He says the reason interest rates have risen so rapidly and are expected to continue to do so is that “there is only a narrow window” due to the speed at which economies have recovered after the pandemic, while also being keen to regularise monetary policy in advance of any economic slowdown in the future.
Yeats' view is that with unemployment generally very low around the developed world, “economies can tolerate rates going a little higher from here”, and says that he thinks bonds may be starting to price-in correctly the longer-term inflation outlook.
He says: “The days of inflation being very low are probably over, I think it will settle down at between 2-3 per cent, and I think bonds are already pricing in that sort of outcome.”
In that scenario, bonds would presently be fairly priced for the long term. Yeats says he does not believe a recession is imminent due to the presently very low unemployment rate.
An investor determined to escape the uncertainty of rising interest rates and commodity-induced inflation could look to emerging market bonds, as rates have already risen in many of those economies, so the next moves could be downwards, while higher commodity prices boost economic growth.
But Carter tends to avoid this part of the market, saying there are often idiosyncratic risks that are difficult to account for, so he prefers more generic high-yield bonds.
Keen’s reluctance to invest in emerging market bonds centres on his view that such assets tend to perform poorly when the US dollar is strong, as it presently is.
Thomas Wells, who runs an inflation-linked bond fund at Sanlam, says that while the securities in which he invests have become more expensive, they presently offer a protection against inflation, in that the yields they pay match inflation.
Quantitative tightening
Thompson says that while the consensus opinion is that quantitative tightening should lead to bond prices falling because central banks will be selling vast quantities, it is also possible that the market response to quantitative tightening could be to anticipate the resulting economic slowdown and so buy more bonds. Though he says the latter is not his view at present, he thinks it is a possibility.
Foster says he “doesn’t know” why quantitative tightening is happening now, as there is no urgency to do it, whereas there is a need to raise rates.
His fear is that QT alongside rate rises could precipitate a recession, alongside a sell off in the bond market.
