Amid uncertainties surrounding tariffs and their impact on living costs, fund managers are increasingly investing in inflation-hedging bonds. Since mid-January, the Bloomberg Global Inflation-Linked Bond Index has risen about 5% as investors brace for potential market volatility driven by rising inflation expectations.
Inflation-linked bonds are seen as a valuable option to guard against rising prices, especially in the face of policy uncertainties. Philadelphia Federal Reserve Bank President Patrick Harker recently warned of increasing economic risks partly due to rising prices, which has fueled the index's growth. The uncertainty following U.S. President Donald Trump's tariff announcements has led to negative market sentiment, triggering stock market declines, a weaker dollar, and outflows from Treasury funds.
This environment has also resulted in falling Treasury yields, complicating investment strategies. Despite many investors preparing for rate cuts, Nicolas Trindade from AXA Investment Managers noted the possibility of rising inflation, which could increase market volatility. He highlighted that major risks in the coming years include a significant rebound in U.S. inflation due to tariffs, tax cuts, and immigration restrictions, potentially prompting the Federal Reserve to hike rates again.
Short-term inflation expectations now exceed long-term ones, reflecting concerns about price changes across the economy. Bridgewater Associates' Co-Chief Investment Officer Bob Prince described inflation-linked bonds as a valuable choice amid rising prices. Bank of America strategist Mark Capleton anticipates increased interest from retail investors in short-term U.S. Treasury Inflation-Protected Securities funds due to tariff risks and policy uncertainties.
This recent rebound follows a challenging year when the inflation-linked bond index fell nearly 4%, marking the biggest drop among Bloomberg's major fixed-income benchmarks. As the Trump administration's tariff plans fluctuate, fund managers continue to prepare for potential market turmoil. Despite these challenges, Oaktree Capital Management's Co-Founder Howard Marks (Trades, Portfolio) remains optimistic, considering current credit pricing reasonable and more attractive than stocks.
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