First, let us take a look at real yields. As the above chart illustrates, both 5 and 10 year real yields have pretty much given back all their “Reflation Trade” gains. Another way of stating this is that, if the current drop continues, US real yields are on the verge of making new record lows.

More importantly, this is occurring within a context of falling long dated yields and flattening yield curves, globally, even as prices of the most globally traded commodities remain high. For example, oil, copper, and iron ore prices are still trading at or near their post Covid highs, rather than lows. Compounding the problem of high raw materials costs is the fact that both the global microchip shortage and container ship bottleneck are still nowhere close to being resolved.

Moreover, the large spread (relative to what it was before Covid) between 5 and 10 year real yields continues to persist. This indicates a divergence in how inflation is perceived at the different tenors. As can be observed from the chart above, prior to Covid, both 5 and 10 year real yields traded closely in tandem, with minimal difference between both. However, since the onset of the pandemic, the spread has widened considerably, and remains wide today.

This is reflected in US breakeven rates, with 5y breakevens higher than 10y ones since the start of 2021. This implies that inflation is perceived to be higher in the medium term, and not the long term. Some would seize on this anomaly as an argument that current inflation is transitory, but doing so misses the broader point. Which is that more and more markets are indicating an environment of lower global growth and elevated input costs – the textbook definition of stagflation.