- The sharp and quick repricing of inflation expectations and risk has been a key driver of bond yields globally. This mainly reflects uncertainty over the impact of the reopening of the economy and an aggressive policy-mix. Once risk premia are stripped out, long term expectations are back at the pre-crisis level, but well below the levels prevailing before 2015.
- In the US, the spike is concentrated in the short term, and shows few signs of loss of faith in the Fed’s long-term inflation target, despite the tolerance towards higher inflation within its new framework.
- The latest uptick in euro area inflation expectations is in line with fundamentals. They have potential to gradually rise further as the economy recovers and the ECB remains determined to lift inflation towards the 2% target.
- On financial markets we see less leeway for US inflation expectations (already elevated) to rise sustainably but longer-dated euro area inflation linked bonds are more attractive as inflation risks are still not priced adequately.