LIVE MARKETS-What happens to rates in a time of stagflation?

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WHAT HAPPENS TO RATES IN A TIME OF STAGFLATION?

Since inflation has started to show a "passthrough from higher tariffs" and growth is expected to moderate, Molly Brooks at TD Securities, notes that investors have become increasingly concerned about a potential stagflationary shock.

The U.S. rates strategist notes in a research report that stagflation in the 1970s and the 80s was supply-driven as inflation climbed because of spikes in oil prices. At the time, both rates and equities were generally struggling as corporate profits declined consumer confidence fell.

And persistent stagflation caused a selloff in long-end rates with the market pricing in higher inflation, as well as downward pressure on equities because of the compression in corporate profit margins.

But this time may be different, she writes because companies could use tariffs as an excuse to pass costs to consumers. However, she says, inflationary pressure may make it difficult for the Federal Reserve to cut rates rapidly.

(Sinéad Carew)

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