Nomura Says Duration Trades Risk Becoming ‘Unglued’ by Inflation
“People are so fixated on a growth slowdown, they’re underpricing potential for a stagflationary environment,” a strategist says.
(Bloomberg) -- Investors may be underestimating the chance of stagflation in the U.S. as higher tariffs push up inflation even amid a sluggish economy, according to Nomura Securities International Inc.
“People are so fixated on a growth slowdown, they’re underpricing potential for a stagflationary environment,” Charlie McElligott, a cross-asset strategist, said in an interview on the sidelines of the Nomura Investment Forum Asia in Singapore. “Duration-linked trades should come unglued” in that type of scenario, he said.
He spoke amid an extended rally for longer-dated Treasuries that benefits bets on duration -- a measure of the sensitivity of bonds to shifts in interest rates. Ten-year yields dropped to the lowest since September 2017 this week, and were at 2.23% as of 8:30 a.m. in New York.
Assuming the U.S.-China trade war rolls on, with escalating tariffs and higher inflation, “you’re going to see the curve bear-flatten,” as investors sell off shorter-dated notes to price out Federal Reserve interest-rate cuts, according to McElligott.
He advised watching for the Fed’s language on inflation at its June 20 meeting. If Fed officials stick to their line that disinflationary pressures remain transitory, that’s a signal they’re indeed concerned about inflation, he said. That in turn will curb their ability to lower rates, he said.
“They want to save that ammo for when they really need it,” he said of monetary easing. Most likely it would take something like an economic contraction for the Fed to move, he said.
--With assistance from Rita Nazareth.
To contact the reporter on this story: Joanna Ossinger in Singapore at jossinger@bloomberg.net
To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Tan Hwee Ann
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