In recent years, markets have reacted positively to signs of inflation. Inflation has been indicative of improving conditions in the economy, and central banks have been encouraging it through artificially low rates and quantitative easing. Gopi Karunakaran, Portfolio Manager at Ardea Investment Management, says this is all changing in 2018.
“We are now shifting into a bad inflation paradigm. A bad inflation paradigm is one in which markets become very concerned that there will be an overshoot of inflation; we’ll get too much inflation, and that will force central banks to tighten monetary policy much more aggressively than markets are priced for.”
In today’s video, Karunakaran makes his case that there could be a significant selloff in bond yields.
- Since the financial crisis begun, markets and central banks have been concerned about a lack of inflation, or even deflation
- Central banks have kept rates artificially low through quantitative easing and low or negative cash rates
- Since the crisis, markets have viewed inflation as a positive sign that the economy was improving
- The events in recent weeks have suggested this is all changing, and inflation is now viewed as a negative
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