Bond Outlook July 20th

Whither inflation and whither 10-year yields in USD? To say that opinion is divided is an understatement. It suffices to read the MSI Weekly to see Roach arguing that low inflation is a global phenomenon, which prevents its return to the USA, while Berner argues that phenomena like a stronger dollar, cheaper imported apparel and moderation in commodity prices are temporary. We lean towards the latter’s view because the low unemployment in the USA and high capacity utilisation (now 80%) are returning pricing power to suppliers.