Bond markets tempt FAIT amid prospects for a steeper US yield curve
Since the hawkish Fed
meeting in June, investors have talked of a ‘policy mistake’ that could
undermine the central bank’s Flexible Average Inflation Targeting (FAIT)
framework. As attention shifts to the upcoming Jackson Hole meeting of central
bankers, we believe some of these concerns may be overdone.
No FAIT accompli
There were signs earlier this year that bond markets had grown complacent with the idea that the Fed would stand pat forever. That changed quickly after the June meeting of the Federal Open Market Committee, when the Fed gave the first signs of hawkishness. Since then some overcrowded positions have been washed out. Inflation breakevens fell and the US curve flattened.
This makes sense to the extent that the market sees risks that the Fed
will not accommodate a large inflation overshoot, but we think the curve may
have flattened too far. The below chart plots US
10-year breakevens - or the implied average expected inflation rate over the 10
years - alongside the difference in yields between 30-year and 5-year
Treasuries.
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Anthony Doyle is Head of Investment Strategy for the Firetrail S3 Global Opportunities Fund. His primary responsibilities include fundamental idea generation, portfolio analysis, and economic insights including currency and macroeconomic risk...
Expertise
Anthony Doyle is Head of Investment Strategy for the Firetrail S3 Global Opportunities Fund. His primary responsibilities include fundamental idea generation, portfolio analysis, and economic insights including currency and macroeconomic risk...
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