(Bloomberg) -- Money managers are flocking to bonds that hedge against inflation amid uncertainty about tariffs and their impact on the cost of living.
Federal Reserve Bank of Philadelphia President Patrick Harker warned this past week that risks to the economy are rising, in part due to increasing prices. That fear helped spur the Bloomberg Global Inflation Linked Index, a gauge of investment-grade inflation-linked debt in developed markets, to gain about 5% from Jan. 13 through Thursday’s close.
US President Donald Trump has asked the public to bear with him as he seeks to overhaul trade policy, describing the economic pain that’s expected to come with that as a “little disturbance.” Policy uncertainty in the wake of tariff announcements has contributed to a negative shift in sentiment across markets, leading to sharp declines in equities, a weakening in the dollar and outflows in Treasuries funds.
It’s also contributed to falling Treasury yields, which is part of what makes this trade so hard to navigate. But rising inflation is a real possibility now even if many investors are bracing for rate cuts, said Nicolas Trindade, who runs a number of funds at AXA Investment Managers. He expects volatility to increase amid the unpredictable economic strategy.
“The main risk for 2025 is a sharp resurgence in US inflation on the back of tariffs, tax cuts and immigration restrictions that could lead the Fed to open the door to hiking interest rates again,” he said. “The market is definitely not priced for that.”
And looking deeper in bond markets, there are signs that investors are worried about price changes across the economy. Short-term inflation expectations have risen above longer-term ones.
Inflation-linked bonds are a “great option value” in case prices creep back up, Bridgewater Associates Co-Chief Investment Officer Bob Prince wrote in a note this past week. Bank of America Corp. strategist Mark Capleton, meanwhile, expects strong retail interest in shorter-dated Treasury Inflation Protected Securities funds because of the risks from tariffs and other policy uncertainties.
The bonds also typically have longer duration, which can help fuel gains if yields fall.
The latest rebound follows a tough year. In 2024, the inflation linked bond index fell nearly 4%, the most out of Bloomberg’s 20 key fixed-income benchmarks.
Trump’s request for the nation’s backing comes as subprime car owners miss monthly payments at the highest rate in more than 30 years, jobless claims are high by at least one measure, and housing demand faces headwinds from high borrowing costs. Businesses and consumers are already becoming more cautious, with some companies on the west coast pausing investment decisions as they wait for clarity on fiscal and regulatory policy changes.
As the Trump administration’s plans for tariffs shift regularly, money managers continue to prepare for potential turmoil. Investors have been “aggressively buying downside protection” with volatility index call volume and S&P 500 put volume buying near record highs, Apollo Global Management Chief Economist Torsten Slok wrote in a note on Friday.
Still, corporate credit markets remain largely calm for now. Risk premiums on US high-grade corporate bonds have widened since the end of January, but are below the average of the last decade of about 1.2 percentage points. US leveraged loans have been gaining.
Oaktree Capital Management Co-Founder Howard Marks remains positive, writing in a March 6 note that credit is fairly priced in relative terms and offers a better deal than equities even at today’s spreads.
Week In Review
On the Move
--With assistance from Ye Xie and Nishant Kumar.