Predicting inflation’s impact on the bond market

The Federal Reserve is likely to taper asset purchasing towards the end of 2021, says Ben Lord of M&G, and other central banks will follow, leading to higher rates and pushing down inflation expectations.

One consequence is that corporates are not issuing inflation linked bonds and the UK’s Debt Management Office has been running down the proportion of index-linked bonds being issued.

Another is that, as governments are significantly in debt, quantitative easing is likely to continue for some time in order to minimise the impact of that debt upon the public purse. Real yields are negative and that means an increase in inflation might lead investors to look for index-linked bonds and to take additional credit risk.

Published on August 3, 2021

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