Despite the presence of global excess liquidity short and medium-term risks to CPI inflation appear to be limited because of low capacity utilisation and rising unemployment. However, excess liquidity could still potentially stoke new asset price bubbles. Central banks are aware of this risk and are at the moment preparing post-crisis exit strategies from their current accommodative monetary policy stance.Usually less crowded professional markets of inflation-linked bonds and swaps (the trade by retail investors in these markets is rather rare) seem to be rather relaxed about the inflation fear. Charts courtesy of Nordea Markets, my adjustments ... click to enlarge!
Given accelerating global excess liquidity creation, it may only be a matter of time until investors become increasingly unwilling to hold liquidity at the current low level of return. Once investors try to reduce their liquidity holdings, asset prices may again receive a temporary boost from global excess liquidity.
Confused? Think about huge debt leverage ... and liquidity is simply needed that the system is not in a permanent condition of credit crunch?
Well, historical seasonality for bonds is good now ...