Inflation fears to deliver volatility and opportunity

Charlie Jamieson

Jamieson Coote Bonds

For those that found bond market pricing perplexing in the pre-Covid world, April’s strong performance in the face of very strong macro data is hard to explain. Fundamentalist investors could be forgiven for expecting bond yields to be higher on the month as the U.S. economy continued to power ahead driven by extraordinary stimulus and strong data prints.

U.S. employment added 916,000 jobs, significantly higher than pre-Covid averages around 200,000 per month. Retail sales grew by 9.8%, whilst inflation rose to 0.6% month-on-month and 2.6% year-on-year. ​​​​​​Inflation will continue to rise in the coming months on a substantial base effect (as outlined in our recent whitepaper “Over the Inflation Hill”) but this performance of the bond market has occurred without an ascribed media narrative. Bond markets are renowned for their predictive capabilities – is the performance based on an assumption of peak data now that the U.S. stimulus cheques have been mailed out? Or perhaps the rally is based on renewed concerns over COVID-19 variants as another possible explanation as the new Indian COVID-19 variant is proving immune to vaccinations. Geopolitical fears are also heightened around possible flashpoints like Taiwan. Perhaps the market moved over its skies on re-setting to higher bond yields and has moved too far on expectation.

Looking ahead, markets still need to absorb a substantial rise in base affect inflation in the U.S. This is due to the large -0.7 monthly print from April 2020 falling out of the year-on-year calculation. This will see headline year-on-year inflation rise to at least 3.3% with a flat monthly print, so the likelihood of a print in the mid to upper threes is likely for a short period. This will ignite substantial media narrative about the return of inflation, but this is primarily reflation that will fall away as the “inflation hill” is created.

Remember, inflation is sustained price increases, not one-offs due to supply disruptions. We struggle to believe that can happen on a secular basis. That should deliver more volatility ahead, but also provide a wonderful opportunity.

Strengthen your portfolio with global high-grade bonds

In times of uncertainty, adding high-grade bonds to your portfolio can provide much-needed stability, liquidity and diversification. Find out more here.

........
Livewire gives readers access to information and educational content provided by financial services professionals and companies ("Livewire Contributors"). Livewire does not operate under an Australian financial services licence and relies on the exemption available under section 911A(2)(eb) of the Corporations Act 2001 (Cth) in respect of any advice given. Any advice on this site is general in nature and does not take into consideration your objectives, financial situation or needs. Before making a decision please consider these and any relevant Product Disclosure Statement. Livewire has commercial relationships with some Livewire Contributors.

Charlie Jamieson
Chief Investment Officer
Jamieson Coote Bonds

Charles is a co-founder of Jamieson Coote Bonds (JCB) and oversees portfolio management of the Australian and Global High Grade Bond and Dynamic Alpha investment strategies. Prior to JCB, Charles forged a career as a seasoned bond investor from...

I would like to

Only to be used for sending genuine email enquiries to the Contributor. Livewire Markets Pty Ltd reserves its right to take any legal or other appropriate action in relation to misuse of this service.

Personal Information Collection Statement
Your personal information will be passed to the Contributor and/or its authorised service provider to assist the Contributor to contact you about your investment enquiry. They are required not to use your information for any other purpose. Our privacy policy explains how we store personal information and how you may access, correct or complain about the handling of personal information.