Inflation Breakeven Yields
November 22, 2021
Higher real yields (nominal yields – inflation expectations) follow recent attention on easing supply bottleneck pressures on rising Asia vaccination rates and efforts to dwell times at LA/Long Beach ports. Some modest easing in supply constraints should take some pressure off goods prices, while tougher Q1’22 inflation comps should shift the narrative from spiking inflation to a sustained reflation. Labor markets will likely remain tight into mid-next year, with expectations for a sub-4% unemployment rate causing the Fed to hike rates by 25bps at the September meeting with 25bps likely thereafter until real interest rates (interest rates – inflation) get to zero. Reduced inflation expectations over the next several months should take 10-year inflation breakeven yields just below ~2.5% (now ~2.624%), while expectations for a sustained cyclical recovery take 10-year nominal yields closer to 2%. The implication of higher nominal yields and lower inflation expectations means multiple contraction for the Tech sector.