As credit spreads hibernate around record lows, interest rates globally continue their rollercoaster ride. Bond yields generally surged at the end of September, driven by increasingly hawkish central bankers on the back of heightened inflation fears.
The high commodity prices especially and the bottlenecks on the supply side, from the shortage of semiconductors to the empty petrol stations in the UK, are creating very visible inflation examples. That said, many of these inflation drivers will likely prove temporary. Frictions in the economy make good headlines but are usually short-lived and resolve themselves through market forces. Moreover, given the strong fall in US consumer sentiment, we expect growth momentum to slow down. This should alleviate the pressure on the inflation front, even though inflation readings should settle above the US Federal Reserve target of 2% for the foreseeable future. As we have likely already passed the inflation peak in the US, we do not believe in a prolonged uptrend in bond yields. We rather see the latest move as an adjustment from the lows in the summer and expect the establishment of a new range. For risky assets, we believe that we could see another reflation fuelled rally, albeit nothing of the sort we have seen over the last year. We have a cautious stance on duration while maintaining a neutral view on credit spreads, given the already tight levels.