- The first signs of inflation have bubbled up in the market. It is unclear if inflation will be sustainable, but the risks of entering a new inflationary regime need to be considered.
- Many see a return to the pre-COVID environment of secular stagnation. But a breakout to higher inflation would put the Fed in a bind between promoting full employment and proactively reining in inflation.
- History shows bonds can fail to offset equity losses in periods where inflation fears rise. A reflationary reset requires a rethinking of fixed income allocations given that they have been a key beneficiary of long-running deflationary trends.
For further details see:
Systematic Fixed Income Outlook: Tempting FAIT