The bond market is a key part of that. After an era of extremely loose monetary policy, starkly diminished bond yields mean interest payments are doing little to offset losses as prices decline. And even at current levels, real 10-year Treasury yields -- or those adjusted for expected inflation -- remain below zero.
Equity and bond prices falling together may be a feature of the inflation shock. In past eras of supply-driven inflation, government bonds failed to offset equity losses, as prices in both markets moved together, said Jean Boivin, head of the BlackRock Investment Institute.
“Investors will have to live with higher inflation and that will challenge the role of government bonds in a portfolio,” he said. “Central banks will find it harder to contain inflation and also harder to ease if economic growth slows materially.”
That inflation threat has made other assets potentially more alluring than bonds. Pacific Investment Management Co. recently recommended shifting a portion of 60/40 portfolios into in commodities to hedge against elevated inflation. “When inflation increases, asset values generally fall,” and “even a small allocation to commodities may materially improve the inflation protection of a traditional 60/40 stock/bond portfolio,” it said.
This article was provided by Bloomberg News.