The surge in U.S. inflation is sending some of the biggest names on Wall Street into rethink mode, forcing them to recalibrate strategies that depended on bonds as a shock absorber against equity downturns.
Pacific Investment Management Co., the bond-investor giant that dismissed inflation as a “head fake” earlier this year, now expects price pressures to endure. Both BlackRock Inc. and DoubleLine Capital LP have brought forward their forecasts for the next Federal Reserve rate increase to next year from 2023.
Data this month showed the U.S. consumer price index increased a greater-than-expected 6.2% from October 2020, the fastest pace in 30 years. The report confirmed inflation as one of the most underpriced risks of 2021 and hardened concern that a five-year period of steady growth and low interest rates is finally over.
“The short story is that Goldilocks is ending,” said Alberto Gallo, head of credit at Algebris UK Limited in London.
Bloomberg asked top money managers for their views on how to adapt to a period of resurgent inflation. Their comments have been edited for clarity.
Nicola Mai, sovereign credit analyst, Pimco
Sees inflation uncertainty; expects it to drop toward central bank targets next year
“Inflation has turned out to be higher and more persistent than we and most other market participants and analysts expected at the start of the year. Still, we continue to expect a significant deceleration in coming quarters. This is in response to manufacturing supply bottlenecks easing. We also see scope for labor participation to increase, as government benefits are phased out.
While recognizing that inflation uncertainty has increased, we continue to see the risk of a wage-price spiral as contained. Long-term inflation expectations remain well-anchored by the credibility that central banks have earned over the past few decades. After a meaningful boost during the crisis, fiscal policy in developed markets should turn towards consolidation from next year, which should limit the degree of government-led demand impetus.”
Elga Bartsch, head of macro research, BlackRock
Sees a shallower Fed rate-hike path; favors developed-market stocks, TIPS
“Much of the recent rise in inflation is driven by highly unusual supply shocks tied to the post-pandemic restart of economic activity. These imbalances should gradually resolve over the next year. But inflation will settle at a higher rates than pre-Covid levels and above the Fed’s 2% target. We see a structural shift due to the Fed’s monetary policy reacting less to rising inflation than in the past under its new policy framework.
“We expect the Fed to start raising rates next year but the overall tightening cycle will be more muted than in the past and shallower than the market pricing indicates. We prefer developed-market equities over fixed income. A shift toward a higher inflation regime over the medium term keeps us underweight nominal government bonds on both tactical and strategic horizons, while we are overweight inflation-linked bonds.”
Greg Whiteley, head of Treasury trading, DoubleLine
Shifts Fed rate call to 2022 from 2023; short duration relative to their benchmark
“We are really concerned about inflation. Inflation forecasts on Bloomberg are rising but there will be a drop next year. If that proves out, the Fed will be reassured that they can continue with their policy stance. But it’s not certain we will see that drop next year. We are a bit short duration. Rates have room to move higher than where they are right now. It’s hard for me to say TIPS look like a great buy at this juncture because they seem pretty reasonably priced now for reasonable expectations for inflation.”