Some of the world’s leading investors have turned bearish on government bonds from developed countries as they warn of the growing danger of inflation.
Data this week showing the UK’s consumer price index hit 3.7 per cent in December fuelled that concern and sent benchmark British borrowing costs to an eight-month high of 3.72 per cent.
In Europe, inflation has risen above the European Central Bank’s target for the first time in more than two years, leading investors to bet on interest rates rises in the eurozone and UK this year.
The trend has caused homeowners to rush to fix their mortgage rates as lenders withdraw their cheapest fixed-rate deals.
“Why would you want to be a bondholder with bond yields so low and that sort of inflationary trend,” Bill Gross, who runs the world’s largest bond fund at Pimco, told the Financial Times. “If CPI continues above 3 per cent in the UK and 2 per cent in the US, then we are accepting negative real interest rates, and that is not an attractive investment.”
Jim Rogers, a veteran investor based in Singapore, said western governments were concealing the extent of inflation. He would avoid bonds and continue his long-held preference for commodities.
“There has been inflation but the US and UK governments lie about it ... Money all around the world is becoming more and more debased so you need to own real assets.”
Markets have been pricing in higher inflation expectations since the summer. Break-even rates, which measure investors’ expectations for inflation, have risen steadily since August in the US, UK and Germany to 2.2 per cent, 3.1 per cent and 2 per cent respectively, but they are still reasonably subdued.
UK mortgage brokers have reported a surge in demand from private clients for fixed-rate deals in the past week, spurred by the shock rise in inflation. “We’re getting more and more enquiries from clients wanting to fix their mortgage for five years,” said Simon Gammon of Knight Frank Finance.
First Direct, Halifax, Yorkshire Building Society and Barclays Wealth became the latest lenders to pull their most competitive fixed-rate products and increased rates by as much as 0.5 percentage points.
A survey by Northern Trust found 62 per cent of investors thought global inflation would rise in the next six months, while 53 per cent thought market interest rates would rise this quarter. But their concern was tempered by faith in strong economic growth.
Inflation has been strongest in emerging markets such as China, where inflation was 4.6 per cent in December, just below a two-year high, and economists expect strong price increases early this year.
However, other well-known investors are sanguine about the inflation outlook. Anthony Bolton, the Fidelity stock-picker who deferred his retirement to invest in China, said: “I don’t think inflation is going to be a major problem ... In this two-speed world, I expect that, despite the higher inflation in emerging markets, the flow of money will still be from the developed world into the emerging one.”
Bankers said there was increasing demand among investors for floating-rate debt, where interest payments increase as rates do.
But borrowers such as companies are rushing to lock in cheap fixed-rate deals. “There is a big battle brewing here,” said one senior debt banker in London.