Global Markets Daily:When Do Higher Bond Yields Become a Problem for Risk?(Garzarelli)

The rise in bond yields continues, led by a repricing in US inflation expectationsfrom very depressed levels.

    Our models suggest that, in principle, there is more ‘headroom’ for nominalyields and ‘break-even’ inflation to rise...

    ...before they become a threat to the economic expansion and the broader riskasset complex.

    The speed of the move is, however, concerning, as the direct and indirectexposure to the ‘lower for longer yields’ theme across asset markets ispervasive.

    Also troubling are the spillovers into the Euro area (mostly in the form of higherreal rates across the region), particularly for the high debt peripheral markets.

    This is why we think that the ongoing exuberance around even faster US reflationpost the US election may prove ultimately self-defeating without much moreconvincing signs of a growth upswing.

    Until underlying inflation in Europe and Japan also increase, it is difficult to see aself-reinforcing bond sell-off as the respective central banks will want to prevent asharp tightening in financial conditions.