Fed Hike Aftermath Series: U.S. bond market not pricing any reflation

Global reflation is thought to be one of the factors potential to bring down the economy and the bull market that is continuing for an eighth consecutive year. Especially since 2016, global reflation has emerged many a time in reports and articles published by analysts including us. Speaking recently, Fed Chair Janet Yellen expressed confidence that inflation will reach the target by next year, while German Bundesbank, as usual, kept issuing warnings against inflation throughout the year.

But, the U.S. bond market doesn’t seem to be worried about the threats of reflation. These charts show the inflation compensation demanded by the market remains low, while the U.S. yield curve continues to flatten.

Chart 1: Chart shows that the spread between U.S. 2-year bond and 30-year bond has declined to just 126 basis points, which is the lowest since the Great Recession.

Chart 2: Chart shows that the spread between U.S. 2-year bond and 10-year bond has declined to just 75 basis points, which is the lowest since the Great Recession.

Chart 3: The chart shows the 5-year, 5-year forward inflation expectation at 198 basis points, around 100 basis points lower than the post-crisis peak.

Chart 4: This chart shows the 10-year breakeven inflation rate at 188 basis points, which is around 80 basis points lower than its post-crisis peak.

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