Inflation is not a dirty word, yet
Updated: Jun 14
US core inflation is the highest its been in a generation. May core inflation was 3.8% year on year.
Fixed income investors are not earning that. Which means they need to demand higher interest rates to compensate for inflation.
The question is whether inflation will remain sticky.
A large part of inflation in the US is housing and house prices are rising rapidly. Savings rates in the US have shot up as the government has handed out money meaning employers are struggling to attract staff and so having to pay higher wages. Finally the cost of many items is rising given supply chain impacts in COVID impacted emerging markets.
This is the market's second scary inflation reading. At what point will the bond market buckle and longer tenor interest rates start to rise? As I have written here before there are some segments of the market highly sensitive to interest rates.
The key message is always the same - are investors being compensated for their risks? Bond investors will be asking themselves exactly that right now.