Markets are worried about inflation, but this portfolio manager says that concern is misplaced and it has created an environment that makes this asset particularly attractive now.
Government and corporate bonds have taken a beating, having their worst start to a year so far this century as investors fret about the possibility of rising inflation.
But Quilter Investors portfolio manager Sacha Chorley says investors’ concerns about inflation are misplace, and bond markets are looking their most attractive since 2015.
Inflation worries have recently led to a sharp increase in bond yields—with the 10-year Treasury yield rising nearly 71% since the start of the year—and a corresponding sharp fall in bond prices as prices move inversely to yields given that an increase in inflation is typically bad news for bonds.
Chorley, however, doubts that a significant rise in inflation is imminent.
“If you look at market-based expectations for inflation, it is true that indications are above the 2% target many central banks set,” Chorley said. “But crucially it has been a steady increase since 2020 rather than a sharp rise.”
One important voice that agrees with Chorley’s views on inflation is Federal Reserve Chairman Jerome Powell.
Powell told the House Financial Services Committee this week, “We do expect that inflation will move up over the course of this year. Our best view is that the effect on inflation will be neither particularly large nor persistent.”
Even with a rise in inflation possible, Chorley however notes that structural issues due to the coronavirus pandemic, including a rise in unemployment as support measures wind down, could restrict spending power.
“A lot of emphasis is being put on the mass of savings that has been accumulated during lockdowns,” Chorley said. “But there is no guarantee this cash pile will be spent, especially given the accumulation has largely occurred in wealthier households.
“Central Banks will also ensure inflation does not get out of control and have plenty of room in their policy arsenal to crush any spikes,” Chorley added.
And given the current bond yields and the shape of their yield curves, Chorley says “this looks like the best time to add into government bonds since 2015. Starting to add some fixed income exposure might be quite prudent in order to add some ballast to portfolios.”
In addition to government bonds, Chorley says investors should opt for value stocks over growth stocks now.
“Value has been in the doldrums for some time, but things are looking up for it with increased growth expectations and this rising yield environment,” Chorley said, “and as such, now may be the time to begin adding a more substantial weighting to portfolios.”