Is the Fed About to Fight Inflation? | The Big Conversation | Refinitiv

TL;DR

Bond yields are rising due to inflation expectations, which could lead to a reaction in risk assets or Fed intervention. Yield curve control may be necessary to prevent yields from rising too quickly and destabilizing the market.

Transcript

This is The Big Conversation, and we're looking at one of the biggest themes in the market - bond yields and how far they can go before risk assets react or the Fed intervenes. Long end yields continue to squeeze higher, driven by inflation expectations at a six year high. Now no-one minds a bit of healthy growth, but will the Fed need to initiate ... Read More

Key Insights

• 😮 Rising bond yields driven by inflation expectations and fiscal support packages are a concern for risk assets and economic stability.
• 🍉 The increase in government and corporate debt worldwide is unprecedented and could have long-term consequences.
• 🌐 Sustained upticks in inflation may be unlikely given weak global activity, but supply chain bottlenecks could temporarily increase inflationary pressures.
• 🪡 The convergence of monetary and fiscal policy highlights the need for ongoing government intervention in the bond market.
• 😷 Yield curve control may be necessary to prevent yields from reaching destabilizing levels and to mask underlying inflationary pressures.
• 🥺 Market liquidity and ongoing asset purchases by central banks could lead to bouts of deleveraging and illiquidity.
• 😮 The Fed's risk tolerance to rising yields and the potential for yield curve control remain uncertain.

Questions & Answers

Q: Why are bond yields increasing?

Bond yields are rising due to high inflation expectations and the proposed fiscal support packages in the US Congress.

Q: What is the potential risk associated with rising bond yields?

Rising bond yields could destabilize risk assets and put pressure on the economy. It may also increase inflationary pressures and affect global growth.

Q: What is yield curve control?

Yield curve control is a policy that aims to control interest rates along different sections of the yield curve. This is typically achieved through buying or selling bonds to maintain target rates.

Q: Has yield curve control been implemented before?

Yield curve control has historical precedent, with examples such as the US implementing it during World War II and the Bank of Japan implementing it in recent years.

Summary & Key Takeaways

• Bond yields, particularly the US 10-Year yield, have been increasing as inflation expectations rise and fiscal support packages are proposed.

• The level of government and corporate debt taken on in the past year is unprecedented, with the US leading in both the amount of new debt borrowed and the increase in government debt per capita.

• The market is concerned about the potential for higher inflation, but historical trends suggest that sustained upticks in inflation may be unlikely, especially when global activity is weak in many parts of the world.