Key Correlation Snaps As Bond Market Starts Sniffing Out The Next Stimulus

The longer the Iran war drags on, the more investors have to price in its lasting impact on inflation, growth, and government finances. Market positioning so far has been predictable: long Energy, short everything else. Factor-wise, it’s been about cutting duration - rotating out of growth and into assets that benefit from rising bond yields. Two sides of the same coin.

Yet despite the headlines, there’s been almost no increase in longer-term market inflation expectations. In fact, according to 5Y5Y inflation swaps - which help differentiate between short-term noise such as the current surge in energy prices, and entrenched inflation expectations - inflation over the next 5 Years is seen sliding by 20bps from the January highs and are now back to levels last seen during the April Liberation Day chaos.