• The first important point to note is that, while the initial stage of the increase in global nominal rates at the end of last year was driven by an improvement in the inflation outlook, the most recent tranche has been driven by an increase in real yields.

Indeed, Chart No. 1 shows the changes in the real and inflation components of 5-, 10-, and 30-year nominal yields for the US, the eurozone, and the UK over the last two weeks. As can be seen, part of the increase in real yields has come at the expense of inflation prices in the US. 

This is where one can make the first counterpoint. This behavior of higher real yields and lower negotiated inflation generally corresponds to the market's perception of a tightening of monetary policy, something that is probably too early in the cycle for many central banks to consider (in fact, the ECB explicitly highlighted real yields as something to monitor , and the Fed chairman himself delivered a fairly accommodative message in his appearance before the US Congress this week).

While the recent increase in real yields has not been large enough to cause central banks to backtrack, one might assume that there are levels beyond which they will.

We have argued that a gradual rise in rates was to be expected given the recovery first in inflation expectations and more recently in growth, given the progress of the vaccination process, but not the speed with which levels that could be considered more fair value by the end of 2021. Ultimately, it is the speed of the movement rather than the trajectory that is stressing the market.

When the Fed signaled normalization in 2013 (i.e., four years after the financial crisis), inflation expectations were closer to 2.5% and had been consolidated above 2.0% for some time. Today, they barely exceed 2.0%, considering that the current average inflation target is 2.0%, which means greater tolerance for some persistent inflation. (see Chart No. 2)

Otherwise, the 2013 "taper tantrum" was due to an explicit communication from the Fed that it would begin to withdraw the post-financial crisis stimulus (slowing down asset purchases in the initial stage), and none of that is happening today. While it is true that the conditions for a reflationary process are being created, given the massive monetary and fiscal stimulus, it is also true that we are in a fairly early stage of economic recovery that is not without risks.

Chart No. 1: Breakdown of nominal yield settlement over the last two weeks; in bps

Chart No. 2: Real rates and 10-year US inflation breakeven rates