More pressure on bonds

SINGAPORE (Jan 30): The Federal Reserve has been happy to raise interest rates very slowly despite tight labour markets because of low inflation. However, there are now signs that the underlying pace of price rises is close to the Fed target. This means that interest rate hikes will have to continue and we will see more pressure on bonds.

Inflation has been running well below the Fed’s 2% target over the past year, but this is set to change over the next few months, for three reasons.

First, the current 1.5% year-on-year (YoY) inflation rate has been held down due to a peculiar drop in the price level in March last year. As long as comparisons are made with the pre-March 2017 price level, the year-on-year inflation rate will be held back. That will change in 2Q 2018. Even now the underlying inflation rate is running at 1.9% (by comparing the past three months with the previous three) and the two other factors will give a further boost.

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