How inflation expectations will affect bonds

ON BONDS

Royal London's George Henderson discusses the effects of strong, endemic and benign inflation on bond investors.

The US market is now forecasting inflation of 2% over the next five years, up from 1% last year. Further out, expectations are also rising. The Fed’s favourite measure suggests 2.8% in the medium term. There is justification for these moves. In late 2010, we saw improved economic data, while the Fed extended QE. The market now suggests inflation will be normalised. However, it is the ‘non core’ factors responsible for strong price increases making UK and European central bankers uncomfortable. Policymakers defend their lack of response by citing temporary factors and the ‘one-off’ nat...