Canada Life's Arnaud: New paradigm in bond markets unsustainable

Unconventional monetary policy

The historical relationship between government bond yields and credit spreads has been erratic, with periods of negative correlation alternating with episodes of positive correlation.

Over the past 70 years, the inverted correlation held as conventional wisdom would have predicted: rising yields are a sign of inflationary pressures and economic growth, which in turn are supportive of business conditions and encourage tighter credit spreads. However, there is evidence this relationship has recently weakened. Yields have taken off from their zero (or even negative) level and corporate spreads have risen in sync, despite business and consumption indicators anchored in expansionary territory. Warning bond and equity market sell-off has further to run as inflation fears...