November 11, 2021
A peak in U.S. inflation and global supply bottlenecks will eventually send Treasury yields lower still, allow the Fed to relax and support risky asset prices. Nonetheless, complicated dynamics mean that timing the inflation peak will be difficult. In the near term, a key risk is that the stagflation scare could gather momentum and cause additional financial market turbulence. Uncomfortably high inflation limits policymakers’ options and challenges the Fed Put, at a time when growth in the world’s two main growth engines has moderated sharply. This macro and policy backdrop suggests that bond investors should stay in curve flatteners and limit credit risk.