The GTO ETF and Inflation2021 marks an inflection point for the bond markets. Interest rates have been kept low for quite some time and the Federal Reserve seems to be predisposed to keep them that way. Nonetheless, one enemy of the bond markets could be making an appearance as, mentioned in a Financial Times article: “Bond investors are braced for the risk that 2021 could herald the return of a long-dormant foe: inflation,” the article said. “The price of government bonds has rocketed this year, largely because of the huge bond-buying programmes undertaken by central banks to soften the financial impact of the pandemic. Investors are assuming this support continues, even as economies pull out of their 2020 slump.” “A rebound in inflation, which has been elusive since the 2008 financial crisis, could disrupt these widely held expectations by making the debt market look less attractive,” the article added. “Bonds typically provide investors with a fixed stream of interest payments, which become less valuable as the overall cost of goods and services accelerates.” “Inflation staying low and well-behaved is the foundation on which everything in markets is currently priced,” said Karen Ward, chief market strategist for Europe at JPMorgan Asset Management. “Investors’ assumption is that central banks will be able to stay accommodative well into the economic recovery. If inflation picks up in a way that’s not expected, that would challenge the market’s entire view.”
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