The above chart, which is sourced from the Bank Credit Analyst, depicts the deviation from mean real yields since 1980 for the world’s major government bond markets.

The picture it paints is stark: with a very few exceptions, the valuation of most bond markets stand at more than one standard deviation from long term norms. Some bond markets are approaching or have exceeded two times normal levels.

For the kind of new normal described by these valuations to prevail, something definitive and long lasting has to have taken place with regards to inflation.

We continue to be of the view that greatest risk facing markets is that either growth or inflation surprises to the upside. Bond markets, inflated by non-price sentive buyers, are now priced for only one environment: pervading disinflation.