Many commentators have begun to argue that markets are increasingly complacent about the outlook for global inflation and that the widespread increase in government bond yields last month is therefore only the start of a prolonged move higher. We are sympathetic to the idea that yields will rise significantly over the next economic cycle, as the downward pressure from the recycling of the Asian surpluses and petro-dollars diminishes. However, the more immediate risk is that the current economic downturn will be longer and more severe than generally anticipated, dragging yields lower again.
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