Double whammy of rising interest rates and inflation risk has investors fretting
The lifting of GDP growth forecasts by the Organisation for Economic Co-operation and Development is early evidence of a change in trend
Longer-term bond yields have traditionally been considered a fairly accurate indicator of economic growth and investor confidence. Extensive literature supports the idea of the yield curve as a reliable predictor of recessions and economic activity, including changes in GDP, consumption, industrial production and investment.
All investments come with varying degrees of risk. The key is how that risk is defined: is it a permanent loss of capital, volatility or the spread of potential outcomes? Rising bond yields are one of the investment risks we’re seeing at the moment, largely due to fears that inflation turns out to be higher than investors expect. This is particularly relevant in developed markets such as the US, where much fiscal and monetary stimulus has been directed at Covid-19 relief programmes. Investors are thus being forced to reconsider the yield they get from their investments and whether these yields sufficiently compensate for inflation risk...