It’s Just the Reflation Trade, People!

It was time for some volatility in stocks, and we got it in spades – and a little bit sooner than we had expected. Higher long-term yields are a popular but wrong explanation. The present back-up has been underway for a year-and-a-half, and signals the revival of animal spirits and some progress toward healthy levels of inflation. The back-up in the forward funds rate only brings the market in line with long-standing “dot plots.” The Treasury issuance calendar is heavy, but there is no empirical evidence for a relation between net borrowing and yields. Historically, yield back-ups have been associated with higher equity prices. We have no reason to think that this one will play out any differently.