Treasuries could continue to rebound thanks to inflation this summer
Long-term US government bonds have experienced an unprecedented bear market since 2021. Treasuries have fallen for more than two years, falling as much as 50% from their 2020 peak. This phenomenon can be explained primarily through massive and rapid monetary tightening by the Fed and other central banks.
However, long-term bonds could be poised for a lasting recovery. Indeed, more and more central banks are lowering their rates. The SNB, the ECB and the Bank of Canada have already made rate cuts in recent months while the Fed is expected to follow by the end of the year.
Additionally, the balance between inflation and unemployment is now more balanced than in recent years, with increased risks to unemployment and decreased risks to inflation. The US unemployment rate rose to 4.0% in May, while core PCE inflation fell to 2.8%.
Furthermore, it is likely that US inflation will surprise on the downside in the coming months. Distortions in the seasonality of price indices at the start of the year have greatly attenuated while the deceleration in rental and vehicle inflation is expected to continue and the drop in gasoline prices since mid-April is expected to have an impact. downward pressure on airline ticket prices and catering services.
In the event of a more marked slowdown in inflation (which currently seems most likely) or a greater rise in unemployment, we could observe a greater rebound in long-term bonds.
