The fixed-income fund manager at Aviva Investors, which oversees 243 billion euros ($301 billion) of bonds, is instead loading up on risk and yield curve-steepener trades. He expects the U.S. economy to expand — not shrink.

“The recent trade shocks aside, the U.S. economy looks like it’s on pretty firm footing,” McAlevey said in an interview.

The yield curve can’t be trusted because overzealous central bank purchases have pushed down yields and the term premium, or compensation for buying longer-dated debt, according to McAlevey. And that’s set to change as the Fed runs down its balance-sheet holdings, foreign buyers withdraw, and growth and inflation pick up.

“If the term premium goes up through time, the yield curve should start steepening,” he said. He says the gap between two- and 10-year notes, now at 48 basis points, could return to early 2017 levels of about 125 basis points.

Related: The Fed is About to Crash the Markets Again? 

Steepening?

I expect steepening but in the opposite sense of James McAlevey.

Steepening will occur when the Fed starts slashing rates in the next recession praying like mad to stave off debt defaults.

One Sided Boat

Seldom is opinion as certain about anything as it is today.

I discussed that idea a couple of days ago in Opinion Nearly Unanimous: Inflation Has Arrived.

One Question

I have a simple question: When is the last time such overwhelming consensus on a fundamental economic issue ever been right?

I do not rule out an inflation scare, just as we had in 2008 when crude spiked to $140.

In fact, the above Tweets and articles show it’s clear we are in the midst of such a scare right now.

When?

Yes this bond bull will end. But when?

Meanwhile I side with Lacy Hunt.

I asked him today about his average duration. He replied “a little over 20 years”.

That’s quite a conviction, and quite opposite what the consensus inflationista thinks.

This article has been republished with permission from Mish Talk.