• Long end bonds continue to get trounced, with the latest round of US fiscal stimulus stories adding fuel to the fire. With real yields increasing further, frothy risk assets are now on the backfoot.
• The driver for the yield surge still are improving economic growth prospects now that the pandemic is receding further through a combination of herd immunity, vaccines and social distancing. While there has been some central bank repricing in OIS (the timing of the first rate hike in the US has been brought forward by more than a quarter to early 2023 since the November vaccine breakthrough), it really is a growth story. We’d go so far to say that if froth is purged from risk assets, it will only extend the longevity of the business cycle.
• What’s keeping central bankers awake at night are the frenzied speculation in crypto currencies and parts of the stock market. If the market itself purges bubbles from the system through a rise in real yields, central banks can sit back and watch. They do not have to tighten policy sooner than they would have liked just to purge the excesses from the system. With even higher debt loads in the economy, try to imagine the carnage that will ensue if the Fed and ECB signal that monetary policy will be used to pop (local) bubbles.
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