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How Long Will the Great Reflation Trade Last?

OMFIF  | Mon, Apr 12, 2021

by Nathan Sheets

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Analysts expect the global economy to expand by 6% or more this year, the fastest pace in decades. The US will lead the way, but growth in Europe should also bounce back as the year progresses. And, of course, the Chinese economy will record another solid performance. 

Along with these rising growth expectations have come concerns about inflation. As the global economy shakes off the constraints of the pandemic, demand seems poised to run ahead of supply, at least in some sectors. Firms will need time to bring back workers, formulate production schedules, restart supply chains and ramp up production. Under such circumstances, sporadic bottlenecks and shortages could drive up inflation. 

The seismic shifts in growth and inflation prospects have, in turn, kicked off a massive reflation trade in global bond markets. While the US has been the epicentre of this, yields are up significantly elsewhere as well. 

I’ll leave it to the bond traders to figure out exactly where and when yields peak, but two related questions are important. First, how will central banks respond to the surge in rates? Second, what are some circuit-breakers that could stall — or reverse — this recent rise? 

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