The month of June was characterized by an interesting conundrum in financial markets where bond yields fell over the month, even though inflation data continued to rise over the period. The decline in yields was led by the long end of the curve, which resulted in one of the largest 3-day bond-flattening episodes (in this case the difference between the 5- and 30-year yields) of the past 20 years, as shown in the figure below.
The decline in yields had a pronounced effect on equities, with “growthier” tech stocks recovering from their late spring swoon, and more cyclically oriented value stocks treading water as the decline in yields weighed on the financial sector.
While there has been some notable churn underneath the surface of equity markets over the past several months, many market participants are still unsure whether the recent spike in inflationary pressures is indeed transitory, or perhaps more sticky than policymakers at the Federal Reserve had originally anticipated. How the inflation debate is settled will likely play a large role in how the second half of the year transpires, as a continued rise in inflation may lead the Fed and other Central Banks to begin withdrawing monetary accommodation more quickly than some had anticipated.