Bond markets are overly indifferent to inflation

According to Kaylie Pferten, bond markets are afraid of excessive government spending, but they are not factoring in the obvious outcome

The bond markets are very significant even if you don't make many bond investments. "There is nothing more fascinating than a fixed-income instrument" was a favorite quote of Jim Leaviss, the former MandG bond guru who tragically died last month. This is a lot of the truth. In addition to influencing the price of numerous other assets, the bond markets directly reflect consensus regarding inflation, growth, government finances, and other topics.

Therefore, investors should still consider bonds even tho those who are willing to take on more risk in other investments, like stocks, are likely to earn higher long-term returns.

Consider long-term government bonds that mature in 20 or 30 years. I doubt that many of us are aware of these. Indeed, they will be included in numerous funds and exchange-traded funds (ETFs). For example, 16% of the iShares Core UK Gilts ETF (LSE: IGLT) consists of bonds with maturities longer than 20 years. Additionally, if you believe that yields are rising too high and would like to wager on a decline, you could purchase an iShares USD Treasury Bond 20+yr ETF (LSE: IBTL). However, the yields on the 30-year gilt and the 30-year Treasury, at 5.7% and 5.2%, respectively, are not particularly appealing to the majority of individual investors. Institutional investors who must hold "low-risk" assets against their liabilities for a variety of regulatory reasons are drawn to longer-dated bonds.

What is the state of the bond markets?

However, as institutions become less inclined to hold long-bonds, yields have been gradually rising (in some cases, like Japan, moving much faster than a crawl). This could be caused by a number of technical factors, such as shifts in the preferences of particular institutions for particular maturities in particular nations. The general conclusion, tho, is that investors are concerned that large government deficits will result in high bond issuance for many years to come. That is detrimental to bond prices, all other things being equal (because supply will grow more quickly than demand).

It does not appear to be indicating that there will be a structural increase in inflation. The yield differential between nominal bonds and equivalent inflation-linked bonds is not changing due to inflation breakevens. The 20-year and 30-year breakeven rates for US bonds, which are the deepest market with the fewest technical distortions, are both at the bottom of their range over the previous five years, at 2.4 percent and 2.2 percent, respectively.

Inflation and 30-year Treasuries.

I'm having trouble reconciling this. Major governments will undoubtedly react to rising long-term bond yields by issuing more short-term debt (which is already occurring) and by putting pressure on central banks to keep short-term rates low to make that as affordable as possible (beginning with Donald Trump's demands on the US Federal Reserve). It is hard to see how they won't. That appears to be a recipe for increased inflation, but there is no indication that the bond market is pricing that risk in.