Are bonds going to rise or fall?

Numera captures the prevailing view on Wall Street about the future of bond yields:

• Recovery on track: Strong employment and retail sales figures, alongside falling public health risks, reinforce the view that the US recovery remains on track. Equity investments should yield positive returns in 2022, but high valuations and a likely increase in long­term yields (see below) cap the magnitude of future gains.
• Inflation and yields: High inflation readings are raising fears over Fed tightening. We expect consumer inflation to exceed 4% next year, increasing the likelihood of higher long­term yields. Our modeling work now points to a 50+ bps increase in 10Y Treasuries over the next 12M, reducing the relative appeal of growth stocks.
• Asset allocation: A likely transition from ‘reflation’ to ‘overheating’ continues to support the relative appeal of equity over FICC investments (F1). In managing equity risk, in turn, we suggest favouring corporate bonds and TIPS over sovereign nominal bonds, the
macro hedge that is most exposed to elevated inflation risk.

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