Most bond and equity markets traded lower last week as the trend of slightly better growth and inflation data/expectations, together with less clarity from central banks, continues. Although the recent bond market sell-off has garnered much attention (US 10 year yield up over 50bps from July lows, German Bund moving from -0.2% to +0.17% yield and October representing the worst month in 3 years), some perspective is needed. Yields are still lower than the beginning of the year and, in most developed market cases, have never been lower outside the last 12 months. Similarly, whilst we expected the underlying pick-up in growth and inflation (and think it will continue over the next 6-9 months), it is nowhere near “escape velocity”.
The US is late cycle, the UK will start to feel the effects of Brexit via lower investment and European remains highly fragile and lacking in joined up thinking. This is not to say the bond market offers value. Ultimately, we remain of the view that (longer-term and outside Europe) central banks will increasingly embrace inflation. Moreover, at this point, efforts to create additional monetary stimulus may challenge the faith in money as a store of value and thus also deliver a less bond market friendly outcome.
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