Has Fake News Spread to the Bond Markets?

Fake news. It’s pervasive these days. And it’s no longer exclusively a problem for politicians, journalists and Facebook. It’s made its way into the capital markets too, particularly in areas of major global economic and financial impact.

When the bond markets are clouded by questionable information, it’s that much more challenging for investors to make prudent decisions about risk, income and return.

We’ve sorted through the fake news and analyzed the facts. Here are our takes on the top three misleading characterizations that investors have been asking us about.

Inflation Is Dead. #FakeNews

It’s true that over the past decade, inflation has been remarkably dormant. But investors should look out for rising prices ahead.

Several forces are likely to push prices higher. The first is populism. Populism can exert upward price pressure in three ways: by “raising a drawbridge” that effectively tightens countries’ borders—restricting trade flows, capital and labor; through institutional erosion, such as joining monetary policies to fiscal policies; and through redistribution.

The second inflationary pressure comes from demographic trends. We analyzed more than 150 years of data from the UK showing that, as the working-age population declines, inflation increases. With baby boomers now retiring, a smaller supply of workers and a larger share of retiree consumers should translate into higher prices.

High debt burdens are a third inflationary pressure. A useful way to reduce a large debt burden is to inflate it away. Accordingly, governments may favor inflationary policies. (This tends not to go over well with older voters, however, who resist inflationary policies because they erode the purchasing power of their fixed incomes.)

A counterweight to the above inflationary forces is technological innovation, which drives down prices. We’ve observed this phenomenon for centuries, with the invention of the cotton gin, the emergence of railroads, and more recently innovations in the personal computer and the corresponding decline in computer prices.

However, technology won’t be enough to offset populism, demographics, debt burdens and, critically, the improving employment and GDP picture, which together point to rising prices over the next few years.