MacroResearchBoard

Heading Towards Another Taper-Tantrum – May 17, 2021

A just-published report updated our views on a range of topical investment issues. Of particular interest has been the deteriorating outlook for inflation and growing tensions in global bond markets, with contagion on all asset markets.

While still extremely depressed, especially in real terms, the uptrend in government bond yields is becoming clearer and more global in nature. Most forward-looking economic and inflation indicators herald higher yields ahead. Specifically, our research showed that a re-convergence between (measured) real yields and inflation expectations is inevitable, with the former moving higher. The last time the divergence between real yields and inflation expectations was this large was just before the 2013 taper-tantrum episode, which resulted in a sharp rise in bond yields.

Final Word: government bond yields are far too low relative to the economic and inflation backdrop. We remain underweight bonds within a global multi-asset portfolio, and short Treasurys and Bunds in an absolute return portfolio, while positioned for a steeper yield curve.