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- It is interesting to see that while inflation has continued to surprise positively in the past few months in most of the DM/EM economies, long term bond yields have been falling due to the rising uncertainty.
- In this chart, we scatter plot the US 10Y yield and core CPI using monthly data since 1985.
- Previously, US 10Y yield was significantly higher when core CPI was standing at 4.5%; the trendline shows that the US 10Y yield should be trading at around 8%.
- However, we also know that a stagflationary environment (decelerating growth and accelerating inflation) has historically been negative for stocks.
- Therefore, investors' preference for 'safe' assets such as US Treasuries may remain elevated in the coming months, keeping long-term bond yields low despite rising inflationary pressures.