“Investors Have Made One Gigantic Inflation Bet” With “Devastating” Consequences

The comments above & below is an edited and abridged synopsis of an article by Tyler Durden

Over the past two years, in trying to justify the recovery narrative, central bankers and policymakers have been pushing long-term interest rates higher in order to reprice inflation expectations with one end goal: boost long-term rates while keeping the yield curve steep, and reflate away the record global debt load.

So far it hasn’t worked; after all, central banks only control the short end—with yield curves flattening to levels not seen since the 2008 financial crisis, prompting growing concerns about an inverted yield curve, and thus economic recession. There is another concern: What if they actually succeed?

We now live in a world in which “nearly all financial assets are ultimately priced off the US 10-year yield.” And, with Treasuries priced at extraordinarily low yields because of negative term premia—the result of an experiment in central bank policy combined with complacency that inflation will remain permanently low—the rates are distorting the valuation of all financial asset prices.

This means that investors have made a gigantic bet that inflation isn’t coming back.

As a result, the problem is that “we’ve become so complacent about central bank policies that we’ve quietly tolerated a rise in financial asset prices to the point where even a little inflation would devastate portfolio returns.”

Which is why central banks, whose only mandate in the past decade was to rebuild the wealth effect by raising asset prices, should be extremely concerned with what they are hoping to achieve: They just may get it.