Why this Treasury market “conundrum” isn’t like the last one

One theory among the many attempting to explain the recent decline in US Treasury yields despite rising inflation is that foreign demand has played a part, perhaps because yields are even lower in many other advanced economies. However, we are a little sceptical. Foreign demand may have helped to anchor the long end of the Treasury curve on occasion, including during the mid-2000 “conundrum” period, but other factors seem to have been far more important this time.
Oliver Jones Senior Markets Economist
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Questions and answers as the market narrative shifts

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Asset Allocation Update

Valuations and long-term equity performance

The high valuation of the US stock market is a strong reason to think that returns from it over the next decade will be substantially lower than they have been over the last one. But focusing on the valuation of the entire market does not tell the whole story. Within the market, the gap between the price/earnings (P/E) ratios of the highest- and lowest-valued firms has also become exceptionally wide.

In view of the wider interest, we are also sending this update from our Asset Allocation Service to clients of The Long Run.

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Prospects for risky assets may not be so bright in H2

A rapid recovery in the global economy this year increasingly appears to be discounted in financial markets, and appetite for risk is clearly very strong. That is a key reason why we think that the second half of 2021 will be tougher than the first for most risky assets. At the same time, though, we sceptical of suggestions that we are currently in the late stages of a systemic bubble, of the kind which is bound to collapse under its own weight regardless of the macroeconomic environment.

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