Source: Bloomberg, Unigestion, as of 11 November 2021.
The increasing divergence between economic reality and central bank patience could have negative consequences for both Main Street and Wall Street. Investor sensitivity to inflation numbers has sharply risen over the past couple of months and so has market volatility, especially in the bonds space.
The MOVE index, which measures the implied volatility of 1-month options on a variety of tenors, is at its highest level since March 2020, buoyed by the rising risk of a monetary policy mistake. Fundamentally, the current levels of growth and inflation combined should (historically, in a pre-QE world) grant a sharp rise in interest rates, which in turn could be detrimental to risky assets. For now, only the inflation element has been priced: breakeven curves are now at multi-year highs while real rates remain at multi-year lows, deep in negative territories.
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