Inflation, Deficits and QT Don’t Mean Higher Yields

Michael LebowitzAdvisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.

This is part two of a two-part series. You can read part one here.

Part one of this article discussed the ramifications of policy actions that China and Japan might take. Those large bondholders could temporarily upset the U.S. Treasury market, but I we opined, they do not threaten my forecast for lower yields. Like China and Japan, inflation, deficits, and QT are stories bond bears are telling themselves to justify higher yields in the future.

This article focuses on the inflation outlook, burgeoning fiscal deficits, and QT. Like China and Japan, any of the three factors I discuss in this article can briefly upset the bond market. But inflation, deficits, or QT are not a cause of concern for longer-term bond bulls.

Inflation expectations

Some are starting to worry that inflation is beginning to rise again. For example, Lawrence Summers shared the graph below, implying that prices will ramp back up.

laurence summers