After a long and warm summer vacation in Italy, Denmark welcomes me with 16 degrees Celsius and rain. It's a clear sign that holidays are over and it’s time to roll up sleeves to get our hands dirty -and, I can assure you, in the bond market, there is plenty of dirt.
I want to start off writing about one of the most heated debates at the moment: inflation. No worries, I won't try to persuade you that inflation is transitory or not. After all, I am a bond girl: I care about inflation only when related to bonds and, in this case, about inflation-linkers.
In the wake of the COVID-19 pandemic, central banks worldwide engaged in accommodative monetary policies pushing real yields to record low records. It means that the convenience to buy inflation-linkers diminished while their dependence on elevated inflation readings to perform increased.
Suddenly, central banks' monetary policies are becoming less accommodative due to growing signs of inflation being more permanent than expected.
Looking at the US, we believe the Federal Reserve could surprise the market with an early tapering announcement as soon as Jackson Hole next week. Such surprise will cap breakeven rates and give them room to run on the downside as less accommodative monetary policies will slow down inflation. At the same time, nominal yields will soar, provoking real yields to rise with them.