As 2021 continues to unfold, the combination of highly accommodative monetary policy and increasingly loose fiscal policy is creating a brighter economic outlook, especially as Covid-19 vaccination programmes are rolled out. This raises questions over the prospects for government bonds, which have, until recently, benefited from a 40-year bull market.

In the event of a powerful and synchronised economic recovery, coupled with rising inflation expectations, bond yields will not remain ultra-low: this amounts to a regime change to which the bond market will need to adjust; indeed, this adjustment may already be underway. The debate about the strength and durability of this regime change is key, but it is unlikely to be resolved by the end of the year. High levels of unemployment will allow the US Federal Reserve (Fed) to maintain its mantra of keeping cash rates unchanged for the time being. That being said, should inflation start to pick up significantly, financial-market participants will be anxious for the Fed to clarify under what conditions rates will be raised, thereby warding off the spectre of 1994 when investors felt that the Fed was losing control, leading to a significant bond-market sell-off.