The specter of inflation keeps fixed income managers on the brink

Will the increase in consumer prices this year be a temporary phenomenon, or the beginning of a longer period of inflation?

As the post-pandemic economic rebound appears to accelerate this year, this is a heated debate between Wall Street and Washington policymakers.

Since the beginning of 2021, when politicians cleared the way for another round of large-scale fiscal stimulus, investors have become more comfortable with the risk of rising inflation.

finally $1.9tn plan The policies that the Biden administration was able to pass were carried out at the same time as the Covid-19 vaccination campaign, which prompted economists to raise their growth expectations for the world’s largest economy.

Fed guarantee Until a more inclusive recovery is maintained, it will maintain the ultra-loose monetary policy, which will also help raise inflation expectations. The key forecast from U.S. inflation-protected government securities recently exceeded 2% for the first time since 2018.

But as the possibility of a rapid economic recovery has increased, long-term dormant inflation has left fixed-income fund managers on the margins and have taken precautions to protect their investment portfolios.

Brett Wander, Charles Schwab’s chief investment officer for fixed income, said: “Even if this is not our basic situation, I do have to be aware of the possibility that inflation may exceed expectations.”

“You don’t buy car insurance because you want a car accident. You can buy it just in case.”

According to EPFR Global data, since the beginning of this year, the demand for inflation-protected securities has surged. By the third week of April, more than 12 billion U.S. dollars have flowed into transactions invested in the US Treasury’s inflation-protected securities (Tips). Funds being traded. .

Market participants expect that this year’s traffic will further increase. Some people also expect that the demand for high-yield corporate bonds will increase in the context of strong growth and mitigation of default risks.

The inflow of funds was accompanied by a sharp sell-off of long-term U.S. Treasuries, leading to Biggest quarterly landslide Since 1980.

These bondholders are particularly worried about inflation because the coupon payments on long-term bonds are fixed over an extended period of time and become less valuable as the total cost of goods and services rises.

At the same time, leveraged loans with floating interest rates fluctuating with short-term interest rates are also favored. From January to mid-April, investors invested more than $4 billion in ETFs, which invested in leveraged loans in the United States.

“I really don’t remember that in my 30-year career, I felt that feeling and looked like inflation. [so] Said Steve Sachs, head of capital markets at Goldman Sachs Asset Management.

“What makes me different this time is… Investors from all walks of life are looking for positioning, and more importantly, to protect themselves from inflation in the long run.”

However, Fed officials have Repeat It is expected that the increase in inflation this year will be “temporary”, and this situation will ease once the supply chain restrictions related to the recovery of the coronavirus are reduced.

They also pointed out that the structural forces (including technological development and globalization) that helped keep inflation below 2% of their long-term goal are still in effect.

Mike Stritch, chief investment officer of BMO Wealth Management, said that without “continuous wage pressure,” inflation would not be able to skyrocket. In the labor market that has not fully recovered, there is basically no such force.

James Knightley, chief international economist at ING, warned that despite these guarantees, the risk that the Fed may have to readjust its monetary policy sooner than expected is not trivial. Its new tolerance The inflation rate has risen.

He said: “If things are allowed to run for too long and too long, it will lead to excessive tightening.” “This new framework may open the door to a longer period of loose monetary policy, which needs to be set faster and more aggressively than market pricing. correct.”

This may mean that the Fed withdraws from its $120 billion monthly asset purchase plan ahead of schedule, and may even raise interest rates early before the 2024 timetable issued by the Fed so far.

Knightley added that the possibility of these adjustments will become more apparent later this year.

“In the second half of this year, it’s time for abacus.”

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