Some markets are back to normal. Whether they have been brought there by any normalisation of sentiment is another matter.
Yesterday, the market's best guess at the US inflation rate over the next 10 years, formed by comparing the yields on inflation-protected and fixed- income government bonds, reached 2 per cent. The last time inflation expectations were this high was the week before the Lehman collapse last September. In the aftermath, inflation expectations went negative, implicitly predicting deflation on a scale not seen since the Great Depression.
That scare is over, but a new inflation scare is not yet here. For the five years before Lehman, traders believed in a “Goldilocks” (not too hot,
not too cold) economy, and expectations ranged between 2 and 2.75 per cent. So 2 per cent suggests a benign outcome, dodging the twin fears of deflation and hyperinflation.