Quandary No. 1: The prospect of a robust economic recovery in the second half, with or without a government stimulus, is leading to a selloff in U.S. Treasuries and other government bonds.
As a result, yields are rising across the board (yields move inversely to prices). But these rising yields make bonds more attractive and increase the prospect of central bank action to raise rates—both of which spell bad news for stocks.
Quandary No. 2: Another reason bond yields are rising is that investors are starting to worry about inflation picking up again, and they want yields to reflect that concern.
Policymakers at the Federal Reserve don’t seem to share these worries, and keep protesting (too much?) they are going to hold rates at rock bottom. Deflation is still as big a worry as inflation, they say. More important right now, according to Fed officials, is reducing unemployment. That means not only bringing down the headline rate but ensuring that the decline benefits workers across all sectors.
But inflation expectations have risen above the Fed’s 2% target and one traditional harbinger of higher inflation is expectations becoming untethered.
What are investors to do in the face of these quandaries?
For the moment, they don’t seem to
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