How big a threat is inflation?

In a developed country such as the US, a scenario of rising inflation expectations is usually accompanied by a bear steepening across maturities of the underlying yield curve.

In summary things are going quite well, and in this scenario a rise in government bond yields does not necessarily bring about a tightening of financial conditions.

The Bank of England have just added to the debate about how much of the recent surge in savings will be deployed in the form of consumption as we return to ‘normality’.

So while we do believe inflation will push higher in 2021, we don’t think this will be a major issue for the central banks.

Regular readers will know that we have a positive medium term view of spread products. This is based on a number of factors; valuations in our view are reasonably attractive compared to history, we are convinced that both monetary and fiscal stimulus will remain in place for an extended period of time, and perhaps most importantly we remain at a very early stage of the new cycle.

With September set to be the first negative month for most risk asset markets since March, it is worth analysing what has been driving the reversal.