Bond veteran Greg Vilensky has noticed a buzz of rising inflation, crushed too many times to get carried away with this year’s big reflation trade.
“I have been managing bond portfolios for 25 years, through very large money programs, large deficits and the Fed, trying to raise inflation expectations,” money manager Janus Henderson said in an interview. “As far as I see legitimate reasons why this could happen this time – I could say it very often in the last 12 years.”
Vilensky’s skepticism embodies the cooling enthusiasm of investors for bets related to rapid economic recovery and higher prices. Transactions that favor economically sensitive stocks, steeper yield curves and the rebound in commodities change after a star first quarter.
The MSCI AC World Value Index has lagged by about 6 percentage points since March 8. The benchmark profitability of the treasury withdrew about 1
One of the biggest questions managers are currently facing is whether the growth and inflation-boosted rise, especially in the United States, could lead to a sustainable expansion that will continue to push stocks and bond yields higher. The International Monetary Fund recently upgrade its forecast for global growth for 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 stopping the coronavirus, temporary supply difficulties and basic effects of last year’s disinflation. Rising five-year unemployment in the United States – a scale of inflation expectations – has disappeared as it peaked in mid-March 2008.
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“Inflation and interest rates, especially as a bond investor at the moment, are the call you have to make,” said Elaine Stokes, a fixed-income portfolio manager at Loomis Sayles. “This is the call for your year.”
The answer on the stand for many investors was to reduce some deals aimed at the most acute stage of economic recovery. Vishal Khanduja, a fixed-income fund manager at Eaton Vance Management, has halved its overweight in the US inflation-linked bond portfolio since the beginning of the year.
“Inflation expectations were shifted in 2020 to a” surgical recession, “Handuja said. “The typical post-recession positioning that you’ve seen happening for several years is fast moving through the market.”
Franklin Templeton’s Arab Gulf Bond Fund has has removed its hedge against the risk of accelerating inflation in the United States, as it believes another jump in the profitability of the Ministry of Finance is “possible, not likely,” according to the Dubai-based manager.
As for some traditional inflationary hedges in commodity markets, the story is about to become more complicated than the rebound in oil and copper prices would have suggested so far. Strategists from the BlackRock Investment Institute expect a discrepancy in the asset class, as factors such as climate risks are more fully reflected in pricing.
“The rise in oil from the economic restart is likely to be transient, while some metals may benefit from structural trends such as the green transition for years to come,” a team that included Wei Lee wrote in a note this week.
A huge challenge
Meanwhile, in the bond market, traders are not responding to signs of inflation, as might be expected. On Tuesday, data showed consumer prices in the United States climbed in March by a maximum of nearly nine years, but still the treasury’s 10-year 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 every one of the numbers we’re looking at, whether it’s short-term inflation numbers, economic growth numbers, these things are severely distorted by economic volatility,” Vilenski told Janus Henderson.
– With the assistance of Netty Idayu Ismail and Sid Verma
(Adds a move by Franklin Templeton in the 10th paragraph)