Buckle up for cyclical inflation-fuelled hiccups in markets despite dovish Fed
Possible tighter monetary conditions will drag on equities and bonds
Inflation concern have been rising and investors globally see it as one of the biggest “tail risks” for markets over the next few years. Financial markets generally do not perform well when there is a sudden shift in inflation expectations.
For bonds, inflation may result in tighter monetary conditions, including rising interest rates and less liquidity in the market. In the case of higher interest rates, fixed-income instrument yields adjust upward and prices move lower. This is because the interest payments from existing fixed-income assets become less competitive relative to newer, higher rate fixed-income instruments. Less liquidity and bond-buying from central banks will also affect bond prices negatively...
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