While higher inflation over the short term was already widely anticipated given the recovery of the global economy, expectations are increasing that inflation is not just transitory, with US 10-year breakeven rates (or implied inflation rate) rising to 2.59% as of Oct 29, which is near its highest levels since the Global Financial Crisis.
Inflation is said to be the bane of bonds. Inflation eats away at purchasing power, undermining the attractiveness of bonds as an instrument to deliver steady real returns. More often, bondholders face a double whammy as rates are raised by central banks as a tool to control inflation, which in turn impacts the nominal prices of bonds.
Market talk of higher inflation (and stagflation) has increasingly heated up recently. Seemingly, everything from housing prices and rental rates, car and pump prices, utilities bills to food prices are going up.
