Bonds in the Face of Inflation: the Beautiful and the Damned

In the latest edition of Bond Bites, Jonathan Gregory, Head of Fixed Income UK, explores the potential impact of higher levels of inflation and interest rates on fixed income markets.

Fixed income 31 Mar 2022 2 min read

Jonathan Gregory

Head of Fixed Income UK

Highlights

The safe haven status usually given to government bonds in moments of crisis was not much evident in the opening days of the war in the Ukraine.
The US Federal Reserve has made it clear that bringing inflation under control is their priority.
Engineering a ‘soft-landing’ (i.e. low unemployment and inflation back at target) with high levels of inflation and a buoyant economy is likely to be tricky and require higher rates than are expected today.
There are also deflationary forces at work. This might mean that the Fed is, in fact, starting to tighten policy just as the economy is running into headwinds. Will this risk a deflationary crash later?
On balance we think that the risk to the bond market is tilted towards higher yields, and have therefore remained underweight bonds.