Join Adam Hetts as he speaks to Jim Cielinski, Global Head of Fixed Income, about the direction of inflation and some of the potential pitfalls in traditional “inflation protection” tools.

Key Takeaways

  • Base effects are distorting inflation figures; a permanent rise in inflation likely requires a closing of the output gap and momentum in wage inflation.
  • Treasury Inflation Protected Securities and floating rate securities may solve one type of risk but can open up investors to other underappreciated risks; what’s more investors are not absolved of the need to avoid overpaying.
  • The world may be less synchronised exiting the pandemic, creating potential opportunities for active investors in emerging markets and across the credit spectrum.

Glossary

ABS: Asset backed securities are financial securities that are ‘backed’ by assets, such as loans, credit card debts or leases. They offer investors an opportunity to invest in income-generating assets.

CLO: Collateralised loan obligations are a single security backed by a pool of underlying debt, typically loans issued to corporations.

Cyclicals: companies that operate in areas that are highly sensitive to changes in the economy.

Deflation: a decrease in the price of goods or services in the economy.

Floating rates: variable interest rate on a security that moves up or down in relation to a specific benchmark rate. Securities with floating rates may be named as such, for example, floating rate bonds.

Idiosyncratic reasons: these are reasons that are very particular i.e. outside the norm.

Investment grade: A bond typically issued by governments or companies perceived to have a relatively low risk of defaulting (not meeting) their payments. The higher quality of these bonds is reflected in their higher credit ratings when compared with bonds thought to have a higher risk of default, such as high yield bonds.

Leverage: level of debt in a company, deleveraging is when a company is reducing its debt levels.

Reopening premium: bounce back in prices after economy reopens.

Run rate: current pace of change that is used to make projections about the future.

TIPS: Treasury inflation protected securities are government bonds where the principal value adjusts with inflation.