Pushing for positive momentum: The emergence of inflation concerns and ABS as a hedge

Deep Dive into fixed income

2021 started with a seldom held broad consensus on a co-ordinated global recovery. While the roadmap to economies returning to a normalised footing has been far from straightforward, the progress made under vaccination programmes has cemented growth forecast and brought into focus an increase in inflation expectations.

The US five-year breakeven rate recently touched 2.4%, an increase from 1.96% at year end and the highest level since 2011. The US is in focus given the likely additional fiscal fuel to come from the overdue stimulus package which could amount to almost $2trn. However, contagion across the Atlantic is occurring without getting anywhere near actual rate rises. Why? Several similarities in Europe and the UK are apparent, namely strong H2 growth expectations, continuing loose monetary policy, pent-up consumer demand and savings as well as a healthy banking sector which will transmit t...