“Inflate-Gate”? Don’t Tell That to the Bond Market | Modern Alpha Channel

By Kevin Flanagan, Head of Fixed Income Strategy, WisdomTree

If you’ve been keeping up with my 2021 blog posts, you’ll know by now that my focus has been on the “reflation trade.” Certainly, not all market participants are convinced yet that inflation might make a comeback, but don’t tell that to the bond market.

As I go to press, the U.S. Treasury (UST) 10-Year yield continues to reside at the upper end of the trading range that has been established thus far in the new year, i.e., around the 1.15%–1.20% threshold. While the 2021 trend has been unmistakably to the upside, the UST 10-Year has experienced a brief hiatus from time to time. That is to be expected— from a nearer-term perspective, interest trends can resemble a sawtooth-type pattern. Looking ahead, I continue to see the overarching pattern as a rising one.

10-Year Breakeven Inflation Rate

10-Year Breakeven Inflation Rate

Why is that, you say? Well, take a look at this graph, which measures the 10-year breakeven spread, or what is better known as inflation expectations. Just last week, this gauge rose to 2.19%, the highest level since 2014! Sure, it was easy to see a move from the low of 0.50% in March 2020, the height of the market’s pandemic dislocations, to the 1.75% vicinity, in response to the twin stimulus responses from the Federal Reserve (Fed) and the U.S. government. It is the residual upside that has been witnessed since December to its current level that has caught my attention. If you look closely at the breakeven graph, it is apparent that movement above the 2.30% threshold has been a somewhat rare development over the last 10 years. At its current reading, the breakeven rate is only about 10 basis points (bps) away from that milestone.


In my multi-decade experience in fixed income, I’ve learned the market is a lot smarter than I am. So, when a development like this occurs, I don’t discount what the market is trying to tell me, namely, the chance of higher inflation in the months/years ahead has now increased in a visible fashion.

Against that backdrop, in my opinion, investors should consider positioning their fixed income portfolios for what tends to occur when inflation is beginning to show signs of rearing its head…higher interest rates.

Originally published by WisdomTree, 2/10/21

U.S. investors only: Click here to obtain a WisdomTree ETF prospectus which contains investment objectives, risks, charges, expenses, and other information; read and consider carefully before investing.

There are risks involved with investing, including possible loss of principal. Foreign investing involves currency, political and economic risk. Funds focusing on a single country, sector and/or funds that emphasize investments in smaller companies may experience greater price volatility. Investments in emerging markets, currency, fixed income and alternative investments include additional risks. Please see prospectus for discussion of risks.

Past performance is not indicative of future results. This material contains the opinions of the author, which are subject to change, and should not to be considered or interpreted as a recommendation to participate in any particular trading strategy, or deemed to be an offer or sale of any investment product and it should not be relied on as such. There is no guarantee that any strategies discussed will work under all market conditions. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This material should not be relied upon as research or investment advice regarding any security in particular. The user of this information assumes the entire risk of any use made of the information provided herein. Neither WisdomTree nor its affiliates, nor Foreside Fund Services, LLC, or its affiliates provide tax or legal advice. Investors seeking tax or legal advice should consult their tax or legal advisor. Unless expressly stated otherwise the opinions, interpretations or findings expressed herein do not necessarily represent the views of WisdomTree or any of its affiliates.

The MSCI information may only be used for your internal use, may not be reproduced or re-disseminated in any form and may not be used as a basis for or component of any financial instruments or products or indexes. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. Historical data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. The MSCI information is provided on an “as is” basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each entity involved in compiling, computing or creating any MSCI information (collectively, the “MSCI Parties”) expressly disclaims all warranties. With respect to this information, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including loss profits) or any other damages (www.msci.com)

Jonathan Steinberg, Jeremy Schwartz, Rick Harper, Christopher Gannatti, Bradley Krom, Tripp Zimmerman, Michael Barrer, Anita Rausch, Kevin Flanagan, Brendan Loftus, Joseph Tenaglia, Jeff Weniger, Matt Wagner, Alejandro Saltiel, Ryan Krystopowicz, Kara Marciscano, Jianing Wu and Brian Manby are registered representatives of Foreside Fund Services, LLC.

 WisdomTree Funds are distributed by Foreside Fund Services, LLC, in the U.S. only.

You cannot invest directly in an index.