Great Reflation Trade Brings New Threats to the Stock Rally

For the first time in a long time, there’s a conversation on Wall Street about when equities might start to feel the heat from reflation signals in the bond market.

Powered by a rally in oil and bets on further U.S. stimulus, market-derived inflation expectations are near the highest since 2013.

For now, traders bidding up stocks at records are in a sweet spot with the pandemic recovery projected to boost corporate earnings.

But the recent sell-off in benchmark nominal bonds is reminding investors that faster economic growth brings the risk of higher borrowing costs.

Strategists from Jefferies Group LLC to Goldman Sachs Group Inc. are already turning their attention to the next chapter in the fraught relationship between bonds and risk assets.

“As the market prices in these developments, ‘long-duration’ growth and expensive high-profitability stocks will likely be pressured,” said Jim Solloway, chief market strategist at the investment management unit at SEI Investments Co.

A disappointing jobs report released Friday was taken as yet another sign President Joe Biden will prevail in pushing through his stimulus package. Treasury Secretary Janet Yellen added fuel to the reflationary fire on Sunday, stating that the U.S. can return to full employment in 2022 with enough fiscal support. All that sent bond yields higher across the globe Monday trading, before moves whipsawed in New York trading. The S&P 500 Index rose 0.7% to an all-time high.