The bond market is torn over the potential for higher inflation and lower growth
KEY POINTS
- A volatile environment for government bonds is reflecting worries about both slower growth and stubborn inflation.
- Stagflation, a relic of the 1970s when inflation was high and economic growth slowed, has reemerged in market talk recently.
- While many market veterans see inflation leveling off, fears remain about a low-growth environment where prices keep rising.
A volatile environment for government bonds is reflecting a highly uncertain future for the U.S. economy, pointing to both slower growth and stubborn inflation.
After a burst higher earlier this year that scared markets, Treasury yields have fallen back sharply as investors have switched their focus from worries about price increases to the potential that the rapid burst in post-pandemic activity could start to slow down.
In the 1970s, the mix of higher prices and lower growth was called “stagflation,” a pejorative that has garnered little attention since then as inflation has remained tame over the past few decades.
However, the word is coming up more and more these days as the growth picture gets cloudier.
“The market is trading on the stagflation theme,” said Aneta Markowska, chief financial economist at Jefferies. “There’s the idea that these price increases are going to cause demand destruction, cause a policy mistake and ultimately that slows growth.”