A volatile environment for government bonds is pointing to both slower growth and higher inflation in the US economy.
After a higher burst earlier this year, Treasury yields have fallen back suddenly as investors switched their focus from worries about increasing inflation to the signs of slow growth.
A relic of the 1970s, the mix of increased prices and slower growth which was called “stagflation,” is emerged in market talks recently.
The word ‘stagflation’ is coming up more and more in the market in the last few days as the growth picture gets cloudier.
“The market is trading on the stagflation theme,” says Aneta Markowska, Chief Financial Economist at Jefferies. She adds, “There’s the idea that these price increases are going to cause demand destruction, cause a policy mistake, and ultimately that slows growth.”
Markowska thinks the trade that caused 10-year Treasury yields to fall suddenly from a high of around 1.75% in late March to a low of about 1.18% at the start of this week was a mistake. Yields trade opposite prices, therefore a decrease in treasury yield means that investors are buying up bonds and further pushing prices higher.
Markowska expresses, “Consensus is projecting 3% growth. I think we could grow 4% to 5% next year. Not only is the consumer still very healthy, but you’re going to have massive inventory restocking at some point. Even if demand comes down, supply has so much catching up to do. You’re going to see the mother of all restocking cycles.”
According to her, the bond market, which is the more sober component of financial markets as compared to the go-go stock market, doesn’t seem much convinced.
“Our view is growth and inflation moderate,” said Michael Collins, senior portfolio manager at PGIM Fixed Income. He adds, “The U.S. is going to continue to be a leader in global growth and economic dynamism.”
