We have had many good discussions around Macro lately, so I requested another guest post, enjoy!
It’s well known that one of the biggest drivers of strong performance for global equities since the bottom in March is lower real yields, which has driven Price/Earnings ratios to historically high levels. Real yields, which effectively is nominal yields minus inflation (or inflation expectations), latest peaked in the end of 2018 and has since moved far into negative territory. You remember the volatile Q4 for equities in 2018 which was finally saved by the FED’s U-turn in its hawkish communication.
Chart 1. MSCI World P/E vs US 10y Real yield
Nominal US yields have barely moved since end of March this year despite inflation expectations coming up, reflecting money printing and potentially better growth ahead. Some strategists argue the low nominal yields reflect weak growth expectations but given FED’s new inflation target US Treasury traders are most likely expecting FED to introduce a yield cap in case nominal yields move higher, which gives them a positive risk/reward to own US Treasury.
Chart 2. US 10y Nominal Yield vs 10y Inflation expectations