This note looks across different bond yields and curves looking for value. It follows the recently published report that highlighted 3 recurring and 2 potentially additional disinflationary forces. In conclusion:
There is a wide disparity between different country government bond yield valuations when you compare a country’s government bond yield to its current inflation rate and confront that spread to its historic spread.
The US and Japan are opposite extremes of these valuations, whilst the UK is the standout in Europe.
Throughout the 3 year rise and then decline in core inflation, long dated inflation breakevens have continuously priced that inflation would in the long term remain relatively low - i.e. the market has always priced the current inflation episode to be “transitory” in nature.
The recent steepening in inflation curves is perhaps only the start of a new trend. Inflation curves have steepening opportunities.
Previous research has outlined why 2s10s steepeners in general are unattractive (carry and reinvestment risk fears). A scan across curves, however, shows that one currency steepener is attractive, especially given negative M3, current existing disinflation trends and a strong currency vs trading neighbours