Recovery and reflation re-set show attractions of short Treasuries

There is a significant reflation trade underway, led by the US, with the yield curve bear steepening as investors look to stronger growth and possibly higher inflation once COVID-19 weakens its grip. Investors are focusing on pent-up consumer demand, a V-shaped recovery and restricted supply-chains in the post-COVID world.

This is evidenced in bear steepening of the 2s/10s, and 2s/30s US yield curve, the rise in US inflation breakevens and tightening of credit spreads. The US Fed confirmed on March 17 that it remains committed to holding rates near zero in 2021/22, until the COVID recovery is secure, but bond vigilantes appear nervous that the Fed may get behind the inflation curve, causing a mini re-run of the 2013 QE Taper Tantrum.

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