After central banks responded with substantial Quantitative Easing programs (QE), following the COVID shock in Q1 2020 and the beginning of the vaccine rollouts, demand for inflation-linked bonds has increased.
In fixed income, investors have rotated away from safe haven government bonds, and sought inflation protection instead in the reflation trade, by switching into inflation-linked bonds. As a result, real yields on inflation-linked bonds have fallen since the end of October (despite the increase in nominal yields), and breakeven inflation (BEI) rates have risen, as Chart 1 shows for the US. Such decoupling of nominal and real yields is very unusual, and reflects the highly uncertain economic and financial regime, ushered in by the pandemic.
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