Invesco: Bond Investors Risk Inflation Surprise

Numbed by years of monetary policy angst, U.S. fixed income investors no longer fear that inflation will get out of hand as the result of global central banks’ quantitative easing policies. 

According to Invesco’s first global fixed income study, to be released Monday, the majority of U.S. investors expect moderate growth and benign inflation. Invesco interviewed 79 fixed-income specialists face to face, including chief investment officers and strategists at pension funds, sovereign wealth funds, insurers and private banks in North America, Europe, and Asia.

Since the global financial crisis unfolded in 2008, the Federal Reserve, along with other central banks around the world, have engaged in unprecedented monetary policies, including quantitative easing, which has involved buying trillions of securities. For years, bond investors in particular have warned of the inflation that will result.

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Rob Waldner, chief macro strategist at Invesco, believes the big risk for investors is that they are underestimating inflation risk.

“Often consensus can be spectacularly wrong,” said Waldner in a phone interview. “We know that central banks will start to move away from these accommodative polices. And even though there has been no real inflation for years, there are signs that could change quickly, including low unemployment rates. Ironically, now the market could really be surprised by inflation.” 

If inflation does surprise the markets, interest rates will rise; central banks may get more aggressive, and volatility could come back into the markets, said Waldner.

Fifty-eight percent of U.S. respondents are not concerned by rising inflation, according to the survey. The Invesco study also found that investors are increasingly interested in alternative credit products, including bank loans and real estate debt.