Welcome to the Capital Note, a newsletter about business, finance, and economics. On the menu today: the reflation, mortgage rates rise, Deliveroo’s IPO, and a look at equity duration during a pandemic. To sign up for the Capital Note, follow this link.
The Reflation Is Here
Investors are selling bonds in droves on the expectation of higher inflation. The U.S. ten-year yield now stands at 1.5 percent, near its pre-pandemic level, following a 10 percent decline in ten-year Treasury prices. The magnitude of the sell-off mirrors 2013’s so-called taper tantrum, when a pullback in Federal Reserve asset purchases sent bond prices plummeting.
This time around, the dynamic is reversed: Investors are responding to an overly accommodative central bank, betting that growing aggregate demand will push inflation up. That’s tempered partially by a change in interest-rate expectations. The Fed has guided near-zero rates until roughly 2024, but investors have priced in three rate hikes by the end of 2023, betting that a persistent inflation overshoot will shake the Fed’s commitment to accommodative policy.
With U.S. retail sales posting a record jump last month while producer prices rose, supply and demand appear likely to be imbalanced this year.
For their part, central bankers have dismissed inflation concerns. Fed chair Jay Powell played down inflation concerns in his Senate testimony last week, and redoubled his commitment to holding interest rates low for the foreseeable future.