Bond market trends: rising inflation expectations in the United States
In August, the risk-free returns rose, but remain within the range in which they have fluctuated for several months. The German and US reference bond rates reached respectively -0.40% and 0.75% at the end of the month. The (implicit) volatility of bonds is, as with equities, very low in a historical perspective, which can also be attributed to central bank purchases and their communication on future policy rates.
Striking in the United States is the considerable rise of the investors’ inflation expectations.
After having fallen by more than half following the coronavirus outbreak in March, the inflation expectations have re-reached their pre-coronavirus level again in the United States (around 1.75% based on the 10-year inflation-linked bonds). This evolution reflects the improved economic situation on one side, and on the other, the Fed's communication, to tolerate inflation above the 2% target for some time into the future. In the eurozone, market inflation expectations have only recovered just over half of the lost ground.
The spreads on higher risk issuers were lowered even more in August, both in respect of the governments (southern countries in the eurozone) and the companies. The February (pre-coronavirus) level has not been fully achieved.