Goldman: Nature Of Reflation Trade Likely Different Going Forward

Goldman Sachs note that since mid-November, "breakeven widening has very closely matched the decline in real yields. 10y breakevens, currently at 2.1%, are close to our pre-Georgia targets for YE21. We believe the Georgia election results increase the upside modestly, perhaps to 2.25%. Much of the inflation repricing was the result of a diminishing left tail and a growing probability mass around levels consistent with the Fed's 2% core PCE target, and further increases would require markets ascribing increasing odds of the Fed successfully engineering a sustained overshoot, something we believe is unlikely this early in the cycle (we would be inclined to fade such moves if they occurred). Indeed, we expect most of the upside to growth from here on will be priced as higher real yields - that is, of the roughly 40bp increase in 10y nominal yields we expect by year-end, at least 25bp will have to come from higher 10y real yields. Unlike the front end, where we think real yields haven't yet reached their cycle lows, largely on account of our belief that the Fed will push back against material repricing related to liftoff, several Fed speakers (including Bostic, Kaplan, and Clarida) have indicated a degree of comfort with higher longer maturity rates so long as they are reflective of a strong recovery."