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Investors jumped out of bonds last week after the Bank of England and U.S. Federal Reserve signaled a willingness to hike short-term borrowing costs to combat inflation, the Financial Times reported.
Bond prices fell at the fastest rate in seven months.
Also, soaring energy costs across Europe and the U.K. are leading investors to believe that inflation will persist longer than expected, the FT said.
“Central banks have been trying to convince us that inflation is transitory,” bond fund manager Dickie Hodges at Nomura Asset Management told the FT. “Given the circumstances, I think they’ve been in denial.
“If you can show me one thing that’s cheaper today than it was before” the COVID virus arrived, “I’d be surprised,” Hodges said, “so I think a reassessment has been overdue.”
Europe’s bond selloff was sparked by growing concerns that inflation will last longer than predicted, which would shrink the value of bonds’ fixed-rate returns.
A poll of consumers’ inflation expectations for the rest of this decade has risen to 3.85 in the U.K. and 1.81 in Europe, the highest in 12 and six years, respectively.
The U.S. Federal Reserve also has raised its inflation expectation, pegging 2021’s overall rate at 3.7 percent at the Fed’s meeting last month; in June, it had forecast 3 percent.
The Fed also boosted the 2022 inflation forecast from 2.1 percent to 2.3.
TREND FORECAST: For more than a year, we have been forecasting that when the Fed tightens up its cheap money policies, markets will dive. Bonds’ and stocks’ reaction to the inevitable news that central banks will raise rates at some unspecified time—which may be sooner rather than later—confirms our forecast.
Thus, when U.S. interest rates reach near 1.5 percent, the equity and commercial real estate markets will snap into a severe downturn. And even before reaching that interest rate level the markets and economies will continually decline.