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buy apple account( Stagflation? Recession? Bond market messages puzzle investors


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If bond markets are taken at their word, the world post-pandemic will be defined by stagflation, a toxic scenario that appears at odds with the bounceback indicated by robust economic data and record-high equities.

The flagging of stagflation - high-inflation coupled with low growth - is puzzling, and according to many investors, not trustworthy. Instead, they say, it is a reflection of how central banks' grip over bond markets has distorted markets' signalling power.

Bond yields, nominal as well as "real" ones, which strip out expected inflation, have plunged in the United States and the euro area. Their message: weak growth, requiring years of ultra-loose monetary policy.

Yet, while real 10-year yields on U.S. inflation-protected securities (TIPS) have halved since late March to a record low below -1.20%, a measure of future inflation, known as the breakeven rate, hasn't fallen far from this year's highs.

The 10-year U.S. breakeven rate, the inflation level where returns on nominal bonds and TIPS would be equal, is now at 2.35%.

"It's almost implying that markets are pricing in some form of stagflation," said Craig Inches, head of rates and cash at Royal London Asset Management (RLAM).

He said markets appeared to expect "inflation rates stay high and nominal yields continue to come lower."


Indeed, with inflation data surprising to the upside, the risk is that inflation could be less transitory than central banks believe. U.S. consumers too see inflation at 2.8% in five years time, the University of Michigan's latest monthly survey shows.

It's the message from yields that's at odds with robust growth expectations, recently upgraded by the IMF.

"The only way you can get to (a stagflation) synopsis is if you believe that the vaccines don't work," Inches said.


Still, there are several reasons why investors may lose exuberance about the growth picture.

First, new COVID-19 variants, which according to a Deutsche Bank survey have become the top concern for financial markets.

Second, slowing economic momentum, as U.S. data surprises have turned negative, according to indexes compiled by Citi.

Still, even with all that, Annalisa Piazza, fixed income research analyst at MFS Investment Management, is sceptical of how bond markets seem to be reading the data.

"We're clearly not heading towards a recession," she said. While acknowledging sentiment indicators have likely peaked and growth will moderate, the data "are consistent globally with a pace of growth that is very strong," she said.

Markets have even dialled back longer-term rate hike expectations, seemingly fearing a premature Fed policy tightening choking off recovery.


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