The comeback of inflation? sentix index signals a trend reversal!
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09 March 2015
Posted in
Special research
The latest sentix indices show a very remarkable development: because of the ECB’s aggressive monetary policy investors expect any increase in yields to be prevented. The same investors also think that inflation will pick up soon. Obviously they ignore the consequences of a return of inflation for the bond markets. This is a risk.
In March, the sentix Investment Theme Indices which are surveyed on a monthly basis for bond markets display some interesting developments. On the one hand, they demonstrate that investors expect the ECB’s policy to (still) have a strongly dampening effect on yields in the weeks to come (see graph, blue line). On the other hand, they think that deflationary tendencies will end and that inflation will return to the euro-area. The corresponding sentix index has completed its turnaround this month (see graph, red line).
Bond investors seem to ignore this so far, probably because they expect the ECB to prevent any rise in yields by its current buying programme. But the “QE” experience from the US is different. The “Fed” has managed regularly to drive yields up by its purchasing activities – as higher yields are part of an economic normalisation process to which, in turn, belongs higher inflation.
Whatever might be the real reasons behind investors not expecting yields to rise the development described above represents an important risk factor for bond markets. Rising inflation expectations usually lead – sooner or later – to rising bond yields!
