Mark Dowding, the Chief Investment Strategist for Bonds at RBC Bluebay, argues that financial markets are currently underestimating the level of inflation risk. Speaking to the Handelsblatt, he noted that considering the crisis in the Middle East and rising producer prices, “We have not yet seen the full extent of the inflationary shock.”
Specifically regarding the United States, Dowding advises investors to prepare for inflation rates to remain above the US Federal Reserve’s 2% target for a longer period. Furthermore, he anticipates that Fed Chair Warsh may be willing to tolerate inflation rates of 2.8% or 2.9% without taking the step of increasing interest rates.
The RBC expert is convinced that the market is pricing in only an average of 2.3% inflation over the next five years, calling this projection “simply too low.” He also expressed concern about the deluge of bonds being issued by major US technology corporations. Dowding warned that the market is nearing a tipping point where these heavy new emissions could begin to pose a significant problem for the overall bond market. Therefore, he recommends that investors exercise particular caution when dealing with long-term bonds.
