Rising Inflation Is Part of the New Bond-Investing Playbook

Boston - Earlier this summer, we blogged our view that bond investors will have to adapt to a new regime very different from the one they've grown used to in recent years.

The decade after the financial crisis has been marked by low inflation and investment spending, lagging income growth and a strong U.S. dollar. We expect these trends to reverse direction and potentially surprise investors who aren't prepared.

In this post, we'll focus on an important theme that could be bonds' strongest headwind in coming years, and one that many don't expect to materialize.

That risk is rising inflation.

Our view of rising inflation is based on several factors. They include:

  • Governments focusing more on fiscal policies and spending to maintain economic growth.
  • Trade wars and tariffs that are already driving price increases.
  • Expectations of wage growth as the labor market continues to tighten.
  • Companies' apparent confidence they can pass along higher costs to consumers.
  • Expectations of higher housing costs.
  • Expectations of a weaker U.S. dollar.

The sleeping dragon

It's not surprising that most investors have a ho-hum attitude on inflation risks. The runaway inflation that many forecast in response to massive quantitative easing (QE) from central banks, of course, hasn't materialized.