The third factor is inflation. As Tanguy Le Saout, head of European fixed income at Pioneer Investments pointed out, recent comments by both the Bank of England and the Fed point to the fact that these central bankers are increasingly willing to entertain the idea of an inflation-overshoot.
These views are, in Le Saout’s view the main reason behind the recent bond sell-off and he points out: “Central bankers might find that once the inflation genie gets out of the bottle, it’s very hard to get it back in.
“Even though the authorities may persuade themselves that a little bit of extra inflation might be welcome, bond market investors know the effect that inflation has on their returns, and for those investors there is no such thing as temporary inflation.”
If these are indeed signs that the bond bull market is beginning finally to reach an inflection point or even if it is beginning to change shape as Edwards says, it is probably the “most important shift in the investment environment in our working lifetime, not just for bond investors and asset allocators, but also for equity managers. The implications for performance are massive.”
