The expectation for trading inflation

Spiking inflation has been a significant talking point in 2021, but U.S. Treasury yields have fallen recently, suggesting that there may be more to the story than meets the eyes. In 2021, rising prices were supposed to be the boogeyman that would bring down the “everything rally.” However, with the S&P 500 up 15% thus far this year, that apocalypse has yet to come.

Last year, many experts predicted that inflation would rise in 2021 due to the COVID-19 pandemic. While global economic activity has undoubtedly improved in recent months, some vital interest rate (i.e. inflation) indicators have tempered—particularly Treasury yields in the United States. Treasury yields are used to represent the return on U.S. government debt, and they’re frequently called the “canary in the coal mine” for the overall economy.

Treasury yields represent the return on U.S. government debt and are frequently regarded as “the canary in the coal mine” for the overall economy.


The United States Treasury Note yield rose to above 3% in the fall of 2018 before plummeting to an all-time intraday low of 0.318 percent during the height of the March 2020 financial market collapse. The yield on the 10-year Treasury bond eventually reached a level of 2.50 percent in mid-August, just as many market participants anticipated. Still, it began to sink again about two weeks later.

As of June 14, the U.S. 10-year Treasury Note yield was approximately 1.50 percent—roughly 14% lower than its 52-week peak. More significantly, it is a whole point lower than the worst-case boogeyman scenario. With the worldwide economy recovering and immunisation efforts being carried out worldwide, it’s hard to understand why yields have decreased recently rather than continuing their ascent.

That’s not to say that it’s an easy question to answer; instead, the downdraft in yields is likely a sign of declining expectations for the strength of the post-COVID economic recovery—or at least its duration.


Another element weighing on expectations may be that while vaccination levels in the United States are high (50% of people), the global average is much lower (27%). It is presently thought that about 20% of the entire human population has been vaccinated with at least one COVID-19 approved vaccine.

To put it another way, many people will need to be immunised before many nations reopen their borders to international visitors—including the United States. While tourism isn’t the most significant industry on the planet, it has long been a vital sign of global prosperity.


Reflecting on these harsh vaccination facts, China announced that it would not soon open its borders to international visitors. Even though China has given more than 900 million vaccines within its borders (to date), it doesn’t appear to be changing its mind.

Given that COVID-19 is said to have originated in China, one would anticipate that the reopening of China’s borders will be a significant moment in signalling the “end” of the pandemic. It’s especially crucial given China’s essential manufacturing role in the world economy.

Based on my personal experience, it appears that many other countries in Asia will not be opening up to foreign tourists anytime soon. Vietnam, which benefited greatly from the recent U.S.-China Trade War, is unlikely to reopen its borders to international visitors until 2022.

As a result, if your company is based in the United States, you will be impacted by this. In addition to that, even domestic travel has been restricted because of these new rules. The fact is that fewer business travellers equals less business, as we’ve already seen.

Consider that Hong Kong was the most visited city on earth in 2019, with more than 27 million distinct visitors. That figure plummeted to 3.5 million—the lowest annual total ever recorded—during 2020.

Outside of the travel direction, evidence from other areas suggests that COVID-19 economic recovery expectations are softening. Since May 10, lumber prices have fallen 22 percent. Housing starts in the United States, robustly through 2020, dropped dramatically — 13.4% from March to April. Last month, consumer data collected in May revealed that retail sales in the United States fell last month. In China, where retail sales were also a letdown in May, the same trend was seen.

The U.S. Federal Reserve’s historical propensity to raise rates when things get too hot, coupled with other moderating economic indicators, may help shed light on why the institution has been so confident in predicting that inflationary pressures would “disappear” by 2021 (i.e., be temporary).

Notably, the Federal Reserve is set to announce a policy change on June 16, when the country’s top bankers depart for a two-day meeting. Just a few months ago, Fed officials affirmed their commitment to keeping interest rates in the U.S. (i.e., near zero) over that period.