Since the beginning of 2021, breakeven inflation has risen sharply, and has reached almost 3% at the end of October, leading to a breakout in short term nominal yields and a bear flattening of the yield curve. Now, markets price in two rate hikes in H2 2022.
Over the past decade, breakeven inflation has been relatively steady at around 2%, while 10-year US Treasury yields ranged between 1.5% and 3.5%. Despite the rise in inflation in 2021, Treasuries have not moved to previous levels of 2.5%. Therefore, concerns about a stagflation scenario have increased. At the same time, many of the demand-side and supply-side inflation forces are related to the pandemic and are expected to ease as economic activity normalises.