Why Bond Yields Are the True Reflation Toggle

Published on
January 13th, 2021
20 minutes

Why Bond Yields Are the True Reflation Toggle

Daily Briefing ·
Featuring Nick Correa, Max Wiethe, and Ed Harrison

Published on: January 13th, 2021 • Duration: 20 minutes

Real Vision managing editor Ed Harrison joins Max Wiethe to discuss why he thinks US treasury yields—and not the dollar—is the key to the success or failure of the reflation trade. Together Ed and Max discuss the recent action in the bond market, the knock-on effects this has had for other reflation assets like precious metals, commodities, and equities, and the three discrete outcomes that Ed believes could arise in 2021 depending on the direction and speed of bond market moves. In the intro, Nick Correa provides an overview of the latest Consumer Price Index data.



  • NE
    Nicolas E.
    14 January 2021 @ 19:54
    Can someone explain to me why mortgage rates are going lower. While this big reflation trade has happened and rates have been moving up. 30 year mortgage rates are at historical lows. People are borrowing at 2 pct. Any thoughts?
  • HB
    Hayden B.
    14 January 2021 @ 17:47
    Give us more of Max and Ed, max really compliments Ed’s style. Ed sees multiple scenarios which is his skill, Max gets him to home into high conviction scenarios which is actionable. Perfect pair, it’s magic when you find your partner to navigate markets.
  • TC
    Tim C.
    14 January 2021 @ 02:18
    So I would like to hear an explanation of calculating DCF in this environment. You can't calculate DCF unless you have some model of the real rate of return on risk free assets. The 10yr is also becoming a more difficult signal due to current treasury issuance. That is going to be a big problem at some point. I haven't totally wrapped my head around it, but it is a thing.
    • EH
      Edward H. | Real Vision
      14 January 2021 @ 15:41
      It's a good but tough question. We have two parts to the discount rate, the risk-free rate and the premium. One distinct possibility regarding the DCF is that the 'risk premium for equities has shrunk' narrative is in the process of unwinding. USD assets are expensive relative to other markets overall and even in the value segments. And that speaks to a low equity risk premium. USD assets are in a sort of Goldilocks environment. So, there are a lot of factors that could precipitate a re-evaluation of the USD asset preference including higher rates and/or a lower dollar.
  • ST
    Swamp T.
    14 January 2021 @ 03:12
    US10Y have been steeply rising since Jan 6. To say that now they suddenly influence/influence BTC when they rise again after the weekend is nonsense
    • EH
      Edward H. | Real Vision
      14 January 2021 @ 15:33
      It started even earlier, right from the word go in the New Year, so on the 4th. That suggests it may be portfolio rebalancing. But regarding the reflation trade, the uptick was precipitous enough for people to start to unwind their reflation trades. And perhaps that added to the BTC pullback. My argument isn't that 10-year rate rises suddenly influenced BTC. Rather, it's that rates rose quickly enough and to high enough levels to stoke a USD rise and that caused a whole nexus of related trades to unwind.
  • AH
    Andrew H.
    14 January 2021 @ 11:22
    Do you see the impact of deteriorating credit risk (the insolvency phase) being a key driver of the 10 year bond rate increase?
    • EH
      Edward H. | Real Vision
      14 January 2021 @ 15:28
      No, I don't. I haven't seen a material uptick in credit distress yet. The 10-year yield uptick coincided only with the New Year. It really was a bolt out of left field as if led by portfolio rebalancing. Let's see where it goes because it may be a head fake with the longer term trend toward flat yield curves reasserting themselves and upsetting both the reflation trade and the rotation into cyclicals and value.
  • NT
    Nicholas T.
    14 January 2021 @ 13:01
    Maybe the battle between inflation and deflation will not have a clear winner in 2021. "K-shaped inflation," calls for a new kind of portfolio diversification that tries to benefit from both trends.
  • SS
    Stephen S.
    14 January 2021 @ 00:03
    Please add teh ability to watch at 1.75x ; 1.50x too slow; 2.0x too fast. Thanks!
    • CK
      C K.
      14 January 2021 @ 07:48
      Agreed. And the ability to continue listening to the conversation on the iPhone app even when the app is in the background. Every time I switch from RV to WhatsApp or another application the video/audio stops. Many thanks.
    • wN
      wubbo N.
      14 January 2021 @ 10:37
      There's a chrome addon called video speed controller. But yeah they should definitely add 1.75
  • JL
    Jonathan L.
    14 January 2021 @ 08:14
    Kiss the ring, Max! Great stuff today, thank you gents
  • VA
    Victor A.
    14 January 2021 @ 03:44
    Just curious for a little more description, how exactly does reflation (not driven by growth/demand) drive the yield spike, and how does the yield spike affect the dollar specifically? Thanks!
    • CK
      C K.
      14 January 2021 @ 08:00
      My understanding is that reflation (which is driven by growth/demand or expectations of) leads to inflation (or expectations of). With higher inflation, bond holders demand higher nominal yields otherwise real yields (nominal minus inflation) decrease so they sell bonds and move into higher yielding assets, which causes bond yields to rise. Higher US Treasury yields attract foreign investors in search of yield who have to buy dollars in order to invest in Treasuries, hence increasing the value of the dollar.
  • dj
    dennis j.
    14 January 2021 @ 01:39
    Very interesting. Isn't a drop in birth rate, both short term and long term, the ultimate deflationary driver?
  • SS
    Steven S.
    14 January 2021 @ 00:54
    The Steves have the hat trick!
  • SS
    Steven S.
    14 January 2021 @ 00:53
    Great piece, Nick, Max and Ed. As a non-financial person, I immediately recognized Ed's impressive insights years ago. However, I really continue to be astonished--in an increasing manner--at Ed's understanding of the markets and, broader, the economy. I've learned a tremendous amount. As an academic, Max you need to bring your rigorous interrogation on the air. It's through such discourse that we can vet ideas and discover new useful ones.
  • so
    steven o.
    14 January 2021 @ 00:29
    Why does the date on this read 1/12? I don't think I'm watching this a day late. I notice that the dates on DB's are usually a day behind.