With the US economic surprise index and GDP now rising again, analysts at Citi said in a note Tuesday that the market is trading the reflation trade.
When assessing assets performance in reflation, the investment bank stated that reflation is negative for government bonds, but only slightly so.
“During reflation, government bonds underperform their unconditional returns but mostly go sideways, not down,” the bank explained. “As the Fed usually has only minor cuts left at this point in the cycle, government bonds may do better this time around. A Fed cycle may once again be somewhat shallow, however.”
However, risky assets do well, although valuations are higher than normal in both credit and equities. “Both US equities and credit do well when the global PMI moves above 50,” wrote Citi. “But the crossover typically happens when assets are still cheaper, coming out of a weak spot.”
The firm said it remains more bullish on equities than credit, where valuations are more binding.
