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Breakeven inflation rates and nominal yields: analysis of current and upcoming pressures

 

The essential

 

Long-term rates shot higher after the US elections.

One of the reasons commonly invoked to explain this is the idea that the measures the new US administration will adopt will stimulate both growth and inflation. Alongside this movement, we have also seen a reappraisal of fed funds expectations, and media pressure on the ECB has increased sharply. In addition, the increase in long-term rates has coincided with the rise in the inflation indices in most of the developed countries. Thus, there are several factors behind the rise in long-term rates, and in this article we are attempting to disentangle them and thoroughly analyse the latest trends in long-term rates for the US and European bond markets.

In the current environment of rising inflation (headline inflation first), there is still room for breakeven inflation to rise, more so in Europe than in the US. US long-term rates can only gain more if economic performances endorse an acceleration in the fed funds programme compared to what is currently priced in. On the other hand, in the eurozone, plausible commentary on the end of the ECB’s QE - which we do not think imminent - would no doubt steepen the two-to-five-year segment, with the expectation of rate hikes by the ECB in the coming years. When that happens, the two-year rate could rise sharply, with the idea that the deposit rate could be brought back toward zero. On the other hand, the fiveto-ten and ten-to-thirty-year segments are already relatively steep.

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February 2017

 

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Février 2017

 

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DRUT Bastien , Fixed Income and FX Strategy
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Breakeven inflation rates and nominal yields: analysis of current and upcoming pressures
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