In the pantheon of American leaders, Sarah Palin does not obviously spring to mind.  Nonetheless she did have a good barb at then President Obama in the early stages of his administration when the economy wasn’t going so well when she asked a tea party convention in Nashville (aren’t you sorry you missed that?): “How’s that hopey, changey thing working out for ya?”

From a government bond market perspective, reflation is everywhere but in the price.

A few charts illustrate the buoyant state of economic confidence.

Source: JP Morgan as at 30 April 2017

Global business confidence is not only high, it is coordinated with all of the major developed markets performing well.

This is mirrored in consumer confidence with a particularly marked rise in emerging markets – note the equity performance of luxury goods manufacturers such as Richemont and LVMH for a cross-check on this.


Source: JP Morgan as at 30 April 2017

In this world, one would expect higher government bond yields, steeper yield curves and higher breakeven rates of inflation.  Now admittedly if we take mid-2016 as a starting point all of these conditions are fulfilled.  However, recent government bond price action suggests at least a pause in the “reflation stuff”.

The Federal Reserve started the current rate rise cycle on December 16, 2015.  On that day the 10yr US bond yield traded at 2.29%.  There have been two further increases in rates since then and more are expected.  The current 10yr US bond yield is 2.29% (spooky, no?)

A flattening of the yield curve tends to be a late cycle phenomenon.  The gap between the yield on US 2yr notes and US 10yr bonds is around 102bps.   This spread is close to the flattest it has been since the financial crisis.  Government bonds are anticipatory assets, they provide signals of expectations for future economic activity.

The breakeven rate of inflation is the gap between the yield on an inflation-protected bond and a nominal bond.  The spread provides an indication of the balance between inflation and deflation fears.  In early 2016 deflation fears dominated and this spread fell to around 1.12%.  This spread did react in mid-2016 in anticipation of a stronger global upswing.  However, this spread peaked just below 2.10% at the beginning of 2017 and the level is now 1.84% – not a massive endorsement of “reflation stuff”.