Asset prices and yields rose last week as expectations for more fiscal stimulus and rising inflation impacted markets to start the year. Expectations for inflation over the next 10 years increased to the highest level in several years. At the same time, the yield curve steepened, with long-term yields rising faster than short-term yields.
Given the amount of money in the economy, the rise in risk asset prices is likely to continue. Some of these asset prices will likely move to extreme overvalued conditions as price momentum and liquidity will drive up prices. Ultimately, fundamental valuation will lead to a recalibration, but this can take a significant amount of time.
Given last week’s weak employment report, I will be closely watching commentary from central bankers on the future for monetary policy, as well as opinions on the increase in yields.
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