Editor’s Note: Now that 2020 has ended, people are taking stock. Economic fortune has been split into the haves tied to the tech economy and the have-nots in the food services, construction and retail industries. New Covid vaccines have emerged, and economists are trying to untangle 2021 and any further reversal of fortunes. Here, J.P. Morgan Asset Management’s Bob Michele outlines some realistic surprises that could happen this year as the world tries to wake up from 2020.

Inflation hits 3%. We’re not talking about a random one or two measures of inflation. We’re talking about the entire range: the consumer price index, the producer price index, personal consumption expenditures … maybe even wages. Over the longer term, the output gap will take years to close, and that fact, along with the mountain of debt created, will serve as a natural disinflationary impulse. But the near term is an entirely different story. As vaccines are rolled out, there will be a synchronized global reopening that creates price pressures throughout the system. As consumers start to normalize their lives and consumption patterns, the combination of an existing supply shock and flattening base effects could shake the complacency on the inflation front. As we’ve seen in China, the tendency is for activity to return to normal very quickly once the virus is under control.

The 10-year U.S. Treasury hits 2%. So far during this crisis, we have said that government bond yields will be whatever level central banks want them to be. But has anyone noticed how the Federal Reserve has already allowed a 40 basis point increase in the 10-year U.S. Treasury from around 0.6% for most of the spring and summer to around 1% currently? From 2011 to 2013, with the fed funds rate at 0%, the 10-year Treasury traded in a range of 1.5% to 2.0%. That seemed to be a very reasonable term structure for rates. If the Fed intends to keep the fed funds rate at 0% through 2023, why wouldn’t it be happy with a 1.5% 10-year rate, given that this would imply very negative real yields, rising inflation expectations and accommodative financial conditions? Maybe the Fed is already on that journey, but we should expect that any whiff of inflation this year will bring out the bond vigilantes, who could push the 10-year Treasury to 2% before the Fed shuts them down.

Turkey becomes one of the biggest bond market winners. A combination of political and monetary conflicts led to a dreadful 2020 for Turkish local market debt—which was down around 13.5% in unhedged U.S. dollar terms. We think the policy stars will align for Turkey in 2021 and that the flows into emerging markets will push local market Turkish debt, plus currency returns, to more than 25%. An end to the Turkish central bank’s rate hikes, an economic recovery driven by the return of tourism and flows into an undervalued Turkish lira will be the drivers of return. There is still so much money looking for assets that have been left behind—and this is one of them.

Rising stars exceed fallen angels in the credit markets. Corporate balance sheets are certainly stretched, and investors are concerned about what will happen to credit ratings once the rating agencies return to their more normal surveillance. But weaker companies have already defaulted or restructured, and the rest of the corporate world has raised liquidity and put in place a very low cost of funding. If the grand reopening of the global economy is successful, more companies could migrate from below investment grade to investment grade than vice versa. Europe has already seen its first rising star in telecom company Ericsson.

Bitcoin doubles. With central banks so committed to reaching and then overshooting their inflation targets, there is no realistic end to “paper” money printing for the foreseeable future. It will continue to drive asset price inflation and encourage investors to look at alternative stores of value. While critics point out that Bitcoin lacks many of the safeguards present in traditional currencies (an enforceable exchange via rule of law, etc.), that may be one of its most attractive characteristics to current users. Is it a currency, a commodity or an asset? Each form has some store of value. The mainstream consensus on Bitcoin is that it remains a work in progress, which means the upside could still be considerable.       

Bob Michele is chief investment officer and head of the Global Fixed Income, Currency & Commodities (GFICC) group at J.P. Morgan Asset Management.