After-Effects of the Fed's Money

     Long-term bond yields have been rising as the Federal Reserve runs its money-printer and spends billions of dollars a week on government bonds and other assets after the pandemic. A steepening of the yield curve is often a signal of improving growth outlook, indicating that riskier assets such as stocks are rising. However, some investors are worried that the curve's warning on inflation, and U.S. economic activity may have only just reach the bottom.

    The risk that markets fronting is that the post-pandemic U.S. economy could experience stagflation (low growth and high inflation) for years to affect the market, as happened in the 1970s. Plenty of cash is pouring into funds investing in inflation-linked securities, and the break-even ratio, a measure of inflation expectations, is recovering.

The Federal Reserve has implemented unprecedented monetary easing measures to recover from deflationary anxiety in March. However, while job come, the accelerating inflation is not far from ideal. At a time when most bond investors expect interest rates to remain low for years, the surge in yields could be dangerous.