Investor expectations for European recovery hit record

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Bloomberg

Inflation slows the emergence of bonds and stimulates demand for safe-haven

(Bloomberg) – As the global economy rebounds and commodity prices hit multi-year highs, emerging market investors are seeking refuge in the one area that offers protection against inflation fears. Inflicted pain on markets, from Brazil to Russia, debt securities linked to the pace of consumer price increases weathered the storm better than their nominal counterparts. . Now, data across the world is showing red flags again. Inflation in the United States in March was higher than estimated, while the CPI also recovered in Peru, Brazil, South Korea and India due to soaring energy and food costs. On Thursday, inflation in Mexico hit the fastest pace in more than three years. Meanwhile, central banks are facing pressure to keep rates low in order to contain the economic fallout from the coronavirus pandemic. “The fastest way for ME policymakers to stimulate the economy is through monetary policy,” said Michael Roche, strategist at Seaport Global Holdings in New York. “This activity reinforces inflation expectations, leading bond investors to seek protection in CPI-linked securities.” Inflation expectations are likely to continue to rise as emerging market central banks take the lead from the Federal Reserve, Roche said. The Fed has indicated that it will continue with its expansionary monetary policy for an extended period. Five-year Treasury ruptures – a measure of bond-based inflation expectations in the world’s largest debt market – climbed to nearly 2.6%, standing near the highest in more than a decade. , with breakeven rates over five years at 4.4% on expectations, the central bank will not be able to contain prices in a context of rising energy costs. Although concerns are strong, inflation accelerated less than expected in March, with underlying pressures remaining subdued for the time being. South Africa’s inflation-linked bonds for 2033 have gained 6.1% so far this year, well outpacing the 1.9% loss in nominal bonds of equivalent maturity. in Brazil are almost as high, with one-year break-even rates climbing to 5.1%, the upper end of the central bank’s target range for 2022, against a backdrop of rising public spending. As a result, Brazilian inflation-linked bonds maturing in 2030 weakened by just 6.8%, even as their fixed-rate counterparts fell 9.6%. In Turkey, the rise in oil prices and a weak currency are expected to fuel soaring consumer costs, even as President Recep Tayyip Erdogan – who has sacked the last central bank chief – is pushing for interest rate cuts. Inflation accelerated to 16.2% in March from 14.6% at the start of the year. Turkish inflation-linked bonds maturing in 2028 have lost 2.1% this year, while nominal benchmarks have plunged almost 21%. potential return of higher consumer prices. Inflation in the North Asian country returned to its pre-pandemic level in March amid rising oil prices and as consumer demand began to recover. Philippine bonds lost 4 , 2% this year in nominal terms while inflation has exceeded 4%, the upper end of the central bank. goal, for three consecutive months due to rising food prices. The risks The strategy involves risks. Edwin Gutierrez, portfolio manager at Aberdeen Asset Management in London, says that while the deal can hold up for about a month, food and fuel prices appear to have peaked. in some big losses, ”Guttierez said. “It’s a bit late for the transaction.” Gennadiy Goldberg, rate strategist at TD Securities in New York, also insists on the need to be vigilant. If inflation doesn’t materialize, “we might see some investors profit from their inflation hedging. and that could lead the movement to reverse ”later this year, he said. For now though, with inflation fears on the rise across the world, investors can still look for hedge. short-term “in inflation-linked bonds,” Goldberg said. “Markets are betting on loose central bank policy, pent-up demand and accelerating growth expectations will create a perfect storm for inflation.” (Updates to include Mexican inflation numbers in third paragraph.) Subscribe now to stay ahead with the most trusted source of business news. © 2021 Bloomberg LP



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