Investors do not need to worry yet about the threat of rising inflation as central banks are likely to view it as a ‘transitory’ reaction to its current policy stance, according to Natixis Investment Managers.
Inflation was likely to rise as a result of rising bond yields and the ‘reflation trade’ had been revived by the improving COVID-19 situation thanks to the deployment of the vaccine.
The US 10-year yield had surged above 1.6% and the yield curve had steepened to 144 basis points which was its widest spread since July 2015.
Esty Dwek, head of global strategy, said inflation would be likely to rise but this would only be a short-term move.
“Inflation is likely to increase in the short-term due to base effects compared to last year’s global lockdowns, supply chain bottlenecks and higher energy prices. However, while pent up demand will be plentiful, we do not believe inflation will be lastingly high given still-high unemployment and ongoing slack in the economy on the services side,” Dwek said.
“As such, we expect the Fed will look through any rise in inflation over the coming months, seeing it as transitory and maintain its current policy stance throughout 2021.”
She said Natixis had acted on the move by reducing duration and favouring credit risk over duration risk in case yields overshot and the Federal Reserve was required to act. It was also looking to ‘buy the dip’ in case of a more pronounced correction in the future as, Natixis felt, there was upside potential for risk assets.
It had also had an impact on equities by leading an acceleration of the rotation towards cyclical stocks and increased the discount on future earnings for growth stocks.
“In equity markets, the reflation trade has only accelerated as a result of the move in yields. The most expensive equity sectors and those that are most duration-sensitive, such as technology, utilities and healthcare, have taken a hit. Those sectors exposed to the reopening and that benefit from rising yields, such as financial, energy and retail, have performed well,” she said.
Over one year to 31 January, the best-performing Australian bond fund within the Australian Core Strategies universe was Elstree Enhanced Income which returned 6.5% versus returns of 1.64% by the sector.
In the global bond space, the best-performing fund over one year to 31 January was Legg Mason Brandywine Global Income Optimiser which returned 12.5% versus returns of 2.2% by the sector.
