Bond veteran Greg Wilensky has seen exaggerations about rising inflation crushed too many times to be left out of this year’s high inflation deal.
“We have managed 25-year bond portfolios through very large monetary programs, large deficits, and the Fed is trying to raise inflation expectations,” money manager Janus Henderson said in an interview. “As much as I could see legitimate reasons why this might happen – I could have said that very often in the last 12 years.”
Wilensky’s skepticism symbolizes investors’ refreshing enthusiasm for bets on a quick economic recovery and higher prices. Transactions that favor economically sensitive stocks, steeper yield curves and the return of goods faltered after a stellar first quarter.
The MSCI AC World Value Index lagged its growth counterpart by about 6 percentage points from March 8 to March 8. The benchmark Treasury yields fell about 13 basis points this quarter, even as US inflation data begins to pick up. exceeds expectations. And on Tuesday a strong 30-year treasury auction suggested it is even the most exposed to interest returning.
One of the biggest questions facing money managers now is whether the stimulated return of growth and inflation – especially in the US – can lead to sustainable expansion that will continue to push stocks and bond yields higher. The International Monetary Fund recently and – updated its global growth forecast in 2021 to the strongest in four decades, but the prospects beyond that are less clear.
Predicting a trajectory for price levels after this year is even more difficult for investors, given the distorting effect of coronavirus closures, temporary supply bottlenecks and basic effects from last year’s disinflation. A five-year rise in US profitability – an indicator of inflation expectations – has faded since they reached their highest level in 2008 in mid-March.
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“Inflation and rates, especially as a bond investor right now, are the calls you need to make,” said Elaine Stokes, Loomis Sayles’ fixed income portfolio manager. “It’s your make-or-break call of the year.”
The answer to the stand for many investors was to reduce some transactions aimed at the strongest stage of economic recovery. Vishal Khanduja, a fixed income fund manager at Eaton Vance Management, has halved its portfolio overweight in US inflation-linked bonds since the beginning of the year.
“Inflation expectations have been dislocated in 2020” in a “surgical recession,” Khanduja said. “The typical post-recession positioning you see happening over several years is quickly moving to the market.”
The Franklin Templeton Bay Arab Bond Fund has he has eliminated hedging against the risk of accelerating US inflation as he sees another increase in Treasury yields as “possible, not likely”, according to his manager in Dubai.
With regard to some traditional hedges against inflation in commodity markets, the story is about to become more complicated than the hitherto suggested decline in oil and copper prices. Strategies at the BlackRock Investment Institute anticipate a divergence within the asset class, as factors such as climate risks are more embedded in pricing.
“Oil growth since the economic recovery is likely to be transient, while some metals could benefit from structural trends, such as the ‘green’ transition for years to come,” a team including Wei Li wrote in a note this week. .
Extraordinary challenge
Meanwhile, in the bond market, traders are not reacting to the signs of inflation as we might expect. On Tuesday, the data showed US consumer prices rose the most in March in nearly nine years, but 10-year Treasury yields fell five basis points to their lowest level in three weeks.
“The huge challenge right now, especially this year, is that the quality of almost any figure we look at, whether it’s short-term inflation figures or economic growth, these things are very much distorted by volatility. said Wilusky of Janus Henderson.
– With the assistance of Netty Idayu Ismail and Sid Verma
(Add Franklin Templeton’s move to paragraph 10)