Topley’s Top Ten – June 26, 2019

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1.Inflation Rolls Back Over….$11 Trillion Globally in Negative Yielding Bonds and Still No Inflation.

The risk of too little inflation

Written by Russ Koesterich, CFA Low inflation may sound appealing, but as Russ explains, it has drawbacks for investors.

By any account the U.S. equity market is having a stellar year. Stocks have benefited from easier financial conditions, which have in turn pushed up market multiples. By a happy coincidence, gains in market multiples have exactly matched the 15% gain in the S&P 500 Index.

But while stocks have benefited from cheap money and higher multiples, they have more recently been constrained by concerns over growth. The challenge is that the same slowdown that led the Federal Reserve to pivot and stop raising rates also puts earnings at risk. Recent developments in the inflation-linked bond market (i.e., Treasury Inflation Protected Securities, or TIPS) suggest that investors are right to be a bit more cautious.

Inflation expectations embedded in the TIPS market are signaling that already low inflation will fall even lower. In late April, the 10-year TIPS breakeven (BE), i.e. the amount of inflation TIPS investors expect during the next decade, was about 1.95%. Today, the 10-year BE is below 1.70%.  The outlook for the next five years is even softer, roughly 1.50%. And while inflation expectations are higher using different market measures, such as inflation swaps, the direction is still down (see Chart 1).

https://www.blackrockblog.com/2019/06/25/the-risk-of-too-little-inflation/ Continue reading →