“Come on down”               

In the popular game show The Price Is Right contestants compete by accurately pricing a range of goods. Today there is probably more punditry on where US yields are going, so our references to many decades ago are a bit tongue in cheek. We don’t see a return to inflation levels from 50 years ago (Back to the future), and anyway believe a great deal is already factored into valuations. The rise of forward real yields and term premium suggests a Fed taper is largely in the price, with timing apparently linked to progress on vaccinations. 

US Treasury belly attractive in consolidation       

As a result of the recent selloff, investors can benefit from good carry-and-roll on the five- to seven-year segment of the US Treasury curve. A period of consolidation would support bullet strategies, i.e. those that favour buying bonds in the middle of the curve versus those in the wings. 

UK rate expectations swing            

We move our 10-year gilt year-end forecast to 50bp (from 30bp) because some MPC members are concerned about the risk of inflation proving more persistent than elsewhere, and we fear market expectations could overshoot. Further bowing-out of the 2-5-10 year segment of the gilt curve is possible. Meanwhile, short-dated RPI forwards now sit above 3.8%, signalling that higher near-term inflation is already in the price, so we think short-dated real yields are vulnerable to market pricing of an early tightening.