Conspiracy Theories

Let’s start with the facts.

  • Yesterday saw the release of the Bank of England’s latest quarterly Inflation Report.
  • For the second time, its growth forecast for 2017 was revised up. This now stands at 2% as against the 0.8% forecast in the wake of the EU referendum result, which the Bank officially and Mark Carney personally expected to usher in immediate economic disaster.
  • Projected unemployment now stands at 5.0%, up from a 2017 forecast of 5.5% last August.
  • Despite this the CPI forecast for this year has been trimmed back: to 2.7% down from 2.8% back in November.
  • The “equilibrium unemployment rate” [a.k.a. the “natural unemployment rate”, a.k.a. the “non accelerating inflation rate of unemployment” (NAIRU)] has been revised down from 5% to “around” 4.5%.
  • Despite its lower CPI forecast the Bank’s sub-trend growth forecast for the years following this one (+1.6% for both 2018 and 2019) is predicated on squeezed real wages under pressure from higher inflation.

Governor Carney took considerable pains to wipe the egg off his face by way of his opening remarks to the press conference yesterday. He admitted, obliquely, that consumer behaviour has not remotely suffered in the way which the Bank assumed it would last summer. But this was dismissed as the least important reason for the higher growth outlook, behind the Autumn Statement, improvements in economic confidence abroad and supportive financial conditions. Be that as it may, Mr Carney’s insouciant defence of his institution’s forecasting record does speak of a certain strength of character and for that at least he may perhaps be applauded.

The fact remains, however, that monetary conditions are still set firmly in emergency mode at a time when inflation is projected to exceed the notional target, the economy is close to full employment and growth is nudging trend. From its rhetoric, however, the Bank is wedded to accommodating unspecified and unquantifiable risks surrounding Brexit and seems intent on keeping policy unchanged for the foreseeable future.

This already looked curious last summer. Today it seems downright insane.

Now to the conspiracy.

Britain is no stranger to having her financial affairs managed on the basis of seeming insanity. Back in 1999 Gordon Brown infamously sold a large amount of the country’s gold reserves in an auction process which he announced publicly in advance. This secured him a bargain basement price for the sale. Gold subsequently multiplied in value and the period was dubbed the “Brown bottom” as a result.

The official explanation for the sale was that it would rebalance the country’s foreign exchange reserves away from a volatile commodity and into thrusting new assets such as euros. Gossip emerged later, however, that at least one major bank, likely JP Morgan, had been shorting gold to fund asset purchases in some size – a classic “carry trade” – and was threatened with serious difficulties should the price rise. Brown’s actions were therefore explicable as being for the greater good of the financial sector: there was method in the madness.

A similar case could be made today. The Brexit vote set sterling on a downward trend which persisted into the autumn. Last year’s foreign asset returns, in sterling terms, were astronomically higher than long run expected rates. And with interest rates near zero the pound is very cheap to borrow. (Remember too that it is one of the world’s reserve currencies and extremely liquid.)

Last year, then, the sterling carry trade was one of the deals of the century. As with the gold carry trade in the 90s, however, if the price of the borrowed asset goes up it doesn’t look very good for the borrowers. A rise in the value of the pound due to changing expectations for interest rates could well pose a risk to one or more banks assessable by a Bank of England Governor as systemic.

Surely it would be absurd to think that the MPC was secretly conspiring to hold down the value of sterling? Well – probably. But its official position appears no less absurd. It is also worth noting that the one key reaction to yesterday’s release and Mark Carney’s comments was a fall in the value of the pound. (Sterling had gone up as high as $1.27 in the morning, then crashed down towards $1.25 again over the course of the day.) The Bank’s forecast for the exchange rate is of near-complete stability at the current level into 2019 – or should that read, “the Bank’s target”?

It is an intriguing possibility. But this blog cannot go in for tin foil hats. So let us conclude simply by repeating the observation that the Bank’s current stance is extraordinary, and, apparently, inexplicable.


03/02/2017 at 6:11 pm

Linking Fortunes

Markets have begun to think about inflation again. In the US the new President is expected to contribute further towards existing pressure on prices; in Britain the weak pound has led to imported inflation as we saw again only this week. Talk in some quarters has turned, quite reasonably, to inflation protection, and specifically to index-linked bonds. This post is for anyone who is unsure what these are or how they work.

The UK was the first significant issuer of index-linked sovereign debt beginning in 1981. Details of the history and mechanics of the market are available from the Debt Management Office (DMO) website here. But the gist is as follows.

Gilts pay coupon interest semi-annually and repay principal on maturity. In an inflationary environment the real value of these interest and principal payments falls over time. So index-linked gilts, or “linkers”, have their coupon and principal varied in line with the Retail Price Index (RPI, the old measure of inflation, as distinct from the CPI measure which the Bank of England still officially targets).

Complicating things slightly there are two sorts of linker. The first, older variety lag RPI by eight months. This is to allow coupons to accrue on the basis of known values: a payment due in six month’s time will be based on the RPI print from two months ago (the additional month allowing for revision to the initial data release), so there is no uncertainty. Reflecting advances in technology, this type of gilt was superseded in 2005 by another which lags by only three months. This still allows for data revisions but by adjusting coupon and principal payments during accrual periods it follows RPI more closely over the life of the bond.

One further concept to mention is the breakeven inflation rate. This is the rate at which RPI would have to run to equalize returns between conventional and index-linked gilts of the same maturity. At present the benchmark ten-year linker yields -1.8% (these yields are always quoted in real terms). The ten-year conventional gilt yields 1.4%. So if RPI runs at 3.2% over the life of the bonds the linker will end up paying the same as the conventional. This tells investors about the relative value of the two types of security at different times, and about the market’s view on RPI inflation of course.

Index-linked gilts are the key securities for investors looking to protect themselves against UK inflation, as measured by the RPI. Of course in the event of RPI deflation then linker payments are cut rather than increased, which is something to bear in mind, as is the tax treatment: while gilt coupons are taxable as income any change in principal, including the full value of the indexation uplift, is completely tax free.

There are some index-linked corporate bonds in issue too. Like ordinary corporate bonds these pay a spread over government bonds to reflect credit risk and other things, but corporate linkers also track RPI in the same way as gilts. For individuals investing outside a tax wrapper, however, there is bad news. Unlike gilts, the principal uplift on corporate linkers is taxable – and taxable as income at that . . .

Of course the UK is not the only country to issue linkers. There is a sizeable French market, for instance. This offers bonds linked to two indices: the standard CPI and the CPI ex tobacco. Other eurozone countries also have index-linked government bonds in issue, which gives investors the opportunity to take views on respective inflation rates for different economies while bearing the same currency risk.

Some emerging market borrowers also issue linkers. Here, of course, currency volatility can be very high. But if inflation is imported on the back of currency weakness this benefits index-linked securities. In 2015 for instance the Brazilian real lost 49% of its value against the dollar. Year-on-year CPI peaked at 10.7%. And over the course of the year, the conventional government bond maturing in 2025 returned -8.1% while the 2024 linker returned 9.9%. For those interested in emerging market debt, then, there are times when indexation can be a helpful angle – where it is available of course.

Less exotically, the largest issuer of linkers is the US government by way of Treasury Inflation-Protected Securities (“TIPS”). The value of this market is currently $1.2trn (as against £603bn for index-linked gilts). TIPS seem to have found their strongest ever following at present. And not without reason: US breakevens from five years onwards are at about 2%, as against a 20-year average for CPI inflation of 2.2%. Should the US economy be entering a period of above average inflation, therefore, TIPS would offer value relative to conventional Treasuries – while giving dollar investors protection from the real-terms erosion of their wealth of course.

Index-linked securities are generally less volatile than conventionals, or thinking about this another way, even more boring. But there can be a place for dullness, or dependability, in portfolios. And in the event of a serious inflationary outbreak, linkers could well turn out to be the best bet in town. It is no coincidence that the British government first issued them on the back of a report from a committee that started work under Harold Wilson in 1977 – a short time after the oil crisis and a year over which UK inflation averaged 16%.

20/01/2017 at 6:39 pm

2016: By The Numbers

The year just gone was noteworthy for its political surprises. Events of great magnitude such as the Brexit vote, the election of Donald Trump and the collapse of the Renzi government might be marked “good” or “bad” according to taste; under “ugly” the threat of terrorism reminded us of its presence by way of some glaring atrocities in Nice and elsewhere. Markets, too, were haunted by fear for much of 2016. We began the year apparently convinced that the financial world would be eviscerated by a Chinese economic collapse, or sequel to the global banking crisis. But while they were haunted by fear markets were not to be governed by it – at least not exclusively.

After some periods of exceptionally high volatility most major stock markets closed the year higher. The S&P 500 returned +11.8%, the Nikkei 225 +2.1% and the Euro Stoxx 50 +4.4%. Leading the pack was the FTSE 100 with +18.6%, its highest return for any calendar year since its recovery post crash in 2009.

As many observers noted – especially those inclined to file Brexit under “bad” – this stupendous performance was to a large degree attributable to translation effects, with much of the large cap index’s earnings coming from abroad. (The FTSE 250 by way of comparison did +6.5% – nothing to be sniffed at but clearly not so much a beneficiary of the weak pound.)

And how the pound did weaken! It lost 16% of its value against the dollar, 14% against the euro, 18% against the yen and 15% against the Swiss franc, its worst performances since 2008.

The distorting effect of the currency on the return profile of international assets to sterling investors was accordingly enormous. The MSCI indices for the developed and EM worlds returned +8.0% and +11.2% respectively last year; in GBP terms those figures rocket to +28.9% and +32.7%.

Look at the EM equity markets individually and the effect was compounded in certain cases by currency strengthening on the other side. The Bovespa Index (Brazil) had a great rally in local terms anyway, up 39%. Since the real also had a super year its sterling terms return was +105%.

Brazil (and Russia) were helped by a recovery in commodity prices which had seemed unthinkable at the start of the year. Oil, whose price collapse had been so very influential, rallied strongly with the near Brent future rising +52.4% (+81.9% GBP). Natural gas did slightly better. The other start performer in commodity world was zinc, up 61%, reflecting renewed demand for steel in China. Other indicators of global economic activity also enjoyed a buoyant 2016 overall, with the Baltic Dry freight index up 101% and the WCI Composite (container) index putting on +65%. At the other end of the pile were some of the other base metals and gold, which did only +8.6%, despite some shows of promise during the year’s various periods of panic and confusion.

With risk assets having more than recovered themselves and energy prices up significantly overall, one might have expected the key bond markets to suffer. As indeed they did – but only into the closing weeks of the year. This turned out not to be enough to take the shine off the massive, record-breaking rallies they were able to set when the sky was falling in. The BofA ML conventional gilts index returned +10.6% last year, while their index-linked cousins trounced even the FTSE 100 with a return of +25.2%. Germany and Japan also saw positive returns (+4.1% and +3.3%), and even the US, where yields were boosted by Trump’s victory, saw an overall positive TR of +1.1% (or +20.6% in sterling terms).

Hard currency emerging market bonds outperformed on the back of spread compression to deliver +9.0% (reflecting a mix of dollar and euro exposure). But the real winner in the credit space, outperforming equity even in the positive year that was 2016, was high yield. The US HY index delivered +17.5% last year (+40.1% in GBP), with euro HY putting on +9.1% (+26.3%).

Finally, property. This was a mixed bag, depending not least on how one approached investing. Anecdotal fears of a negative Brexit effect into the summer were borne out by IPD data on commercial property, with UK prices falling by over 4% to September from their February peak. They recovered very slightly into year end, however, and with rental yield on top the asset class managed a positive total return of +2.6%.

If one had bought REITs rather than buildings, however, the story was different. Falling price/book ratios as sentiment deteriorated saw the sector deliver -7.0% – along with the Chinese stock market, one of the very few negative numbers delivered over the twelve months as a whole. Meanwhile, housing pursued a different path altogether, with residential property prices for the UK still rising at a pace of +6.9% over the year to October.

2016 was a truly extraordinary year in many areas, and asset class returns was one of them – especially for those of us with sterling as our reference currency. It started out as Armageddon, but as these numbers show, the hard thing for investors in hindsight would have been to avoid making money.

Does this mean markets are heading into the New Year with a false sense of confidence?

We will know for sure in another year’s time.

06/01/2017 at 6:47 pm

A Prosperous 2017?

We began the year with an episode of panic. We end it with something of a Santa Rally. And in the meantime a couple of western governments have fallen at the hands of “populism” and the US has elected her first ever president to have served neither in politics nor the military. Can 2017 sustain this level of interest? Here are some thoughts on themes to watch in the New Year.

First of all: interest rates. The trend in “safe haven” government bond markets has already reversed. The Fed shocked some this week by indicating a forward path for monetary tightening which is not quite as glacially slow as had become customary. So this theme is already underway.

Monetary tightening is an unfamiliar concept these days, however, and its effects are unpredictable. Some key details to watch will be the impact of higher rates, if any, on corporate margins (including for private equity) and mortgage borrowers. The possible influence of higher bond yields on fiscal arithmetic could demand attention, especially here in the UK. Higher yields in the US could have all sorts of side effects on emerging market capital flows, credit spreads and equity pricing, and then there is the possible spillover for the dollar.

Volatility, then, is to be expected. And it is (worryingly?) easy to identify disaster scenarios from this source. A central bank, for instance, which balks at tightening policy too fast and decides to leaven the blow with some cosmetic unwinding of its QE program, panicking risk markets in the process. Or a bank which decides to take a risk on supposedly short term price behaviour and holds back on hiking rates . . .

. . . Fuelling inflation. Now this dog hasn’t barked for years and, to stretch the metaphor, has been blocked in its kennel by barrels of cheap oil since late 2014. Will prices take off, especially in Britain and the US? By how much? How will this compare to expectations? What will the impact be on real wage growth? And fiscal arithmetic? And profit margins? Again, disasters on some or all of these fronts are easy to conjure up. And again, inflation is a rather unfamiliar animal nowadays. Here in Britain it hasn’t even reached the Bank of England’s 2% target for three years.

The consensus for a while has been that equities are a good inflation hedge. This might turn out to be true (though it wasn’t at the time of the major price shocks of the 1970s). But earnings reports will bear close scrutiny next year. Equity markets have been filling themselves with cheer a long, long time before the run up to Christmas. If EPS do not catch up with prices then the latter could prove more vulnerable to an unpleasant surprise.

Political risk looks set to continue as we approach the New Year. Europe is an obvious place to focus on with elections in France having drawn a lot of media attention – though the Dutch will get there first (15 March plays 23 April for the first round of the Le Pen-athon). Geert Wilders is likely to win the most seats but will there be some kind of “grand coalition” to stop him becoming PM? Then there are the usual tensions to consider, as well as the overhanging threat of terrorist barbarity in many parts of the world.

Looking at this little list – interest rates, inflation, earnings and politics – it is easy to contemplate next year with a sense of foreboding. But we should not be too gloomy. President Trump’s policies could prove expansionary for the US economy and positive for Wall Street. After all, its reaction to his election on 8 November has seen the S&P 500 rally by 6% since then. Putting Brexit to one side the rest of the EU could well muddle through the possible electoral upsets of 2017 with Brussels and the euro very much intact. They survived the sovereign debt crisis. Will this be any harder? Note, too, that the Dutch referendum to veto an EU agreement with Ukraine (6 April) has been sidestepped with a certain amount of Eurofudge and a newly minted trade deal, with no explicit possibility of accession, has been agreed only this week. PM Rutte is to put it before the Dutch parliament soon.

Manageable inflation and modest rate rises might not trouble markets unduly. Yes, weak EPS could be the straw that breaks the equity market’s back in the right circumstances. Equally, strong earnings growth could be the icing on the cake. Either way, these are some of the key moving parts to keep our eyes on as the calendar turns over another page. The only advice this blog can give is general, and not really susceptible to the calendar at all: where investors have views on these things they should position for them, with careful thought, and ongoing vigilance.

16/12/2016 at 4:52 pm

End Of An Era

“Mr Speaker, I am abolishing the Autumn Statement.”

2016 has already delivered much in the way of political upheaval. But no one was expecting this! Granted, there was much laughter as the new Chancellor told MPs that, having done away with the traditional spring Budget and Autumn Statement, he would be moving to an autumn Budget and a Spring Statement. (He had to clarify that this really was a significant change because the Spring Statement wouldn’t actually say much.)

Thus concluded the only truly dependable projection from HM Treasury. What did the rest of this, the last ever Autumn Statement, have to tell us?

Reports of the event were dominated by the forecast effects of Brexit. Of course, nobody knows what these will actually be. The Office for Budget Responsibility plumped for lower growth, higher inflation and more borrowing than before. Its guesses are worth no more than the Bank of England’s – though they were, interestingly, very different. The Bank, in its Inflation Report out earlier this month, had GDP for 2018 and 2019 coming in at +1.5% and +1.6%. The OBR thinks the answer will be +1.7% and +2.1%. Counter-intuitively the OBR is also forecasting lower CPI inflation (2.5% and 2.1% as against 2.7% and 2.5% over on Threadneedle Street). It is likely mere coincidence that higher growth and lower inflation will have combined to produce a less alarming debt forecast. In any event, the inconsistency serves to demonstrate nicely the speculative nature of all these kinds of exercise.

Regular readers will know how important the level of gilt yields is too. They have fallen since the Budget and this has delivered a projected bonanza of £24bn over the course of the next five years. That is the impact of a fall in gilt yields of all of 0.3%. (So long as they don’t go up again, the nation’s finances are safe. Well, safeish.)

The Chancellor briefly alluded to longevity and suggested that the next Parliament consider doing something about it. This is a good idea: the state pension bill is forecast to reach £101.9bn in fiscal 2020-21, up from £91.5bn this year. And that represents a compound annual increase of only 2.7%. More aggressive inflation, or a higher rate of earnings growth would push the cost higher.

We have no idea what growth and inflation will be over the next few years. Nor does the Treasury have much, if any, control over interest rates. There are, however, material numbers over which it does have some say. And in this febrile political environment, with Brexit on the horizon (or possibly not), public debt already forecast to reach 90% of GDP soon and no medium-term prospect of balancing the books, what is the expected net impact of the Chancellor’s policy decisions? Why, to widen the budget deficit by £4bn next year, £6bn in 2018-19 and £8bn the year after that! And those numbers are predicated on the basis of 43 discrete policy changes covering everything from tax reliefs available to museums to the exemptions regime for social sector rent downrating. Taxes up, borrowing up and the tax code as complex as ever. The ghost of Gordon Brown still hovers over the building whose magnificent remodelling he instigated all those years ago.

But – as many have felt, at times, this year – enough of politics. Despite the mainly Brexit-related fuss it caused the Autumn Statement contained nothing to suggest that the management of the country’s economy is to undergo change. The UK’s national debt remains problematic, and the Treasury seemingly content to be at the mercy of future events. That, from a pure investment perspective, is the key message from the last Autumn Statement in history.

25/11/2016 at 5:10 pm

Yields Jump on “Trump Thump”

The election of Donald Trump to the US presidency apparently “wiped out more than $1 trillion across global bond markets“, as reported by Reuters earlier in the week. The inflationary nature of his policies has not, after all, gone unnoticed. Bond markets have digested new information and responded rationally, by falling in price so as to offer investors the prospect of higher real returns. Yes, the politics have tinged the reporting – as with the economic consequences of the UK’s decision to leave the EU. But surely the picture is clear: an event has occurred, markets have responded efficiently and their response is cause for concern.

As in the case of Brexit, however, the political element seems to have cost some observers their perspective. Starting with the obvious: only part of that $1trn comes from the US itself. And bond markets have been weakening for some time: Mr Trump’s election only accelerated the process. Referring to the BofA Merrill Lynch US Treasury Index, the full market value of US government bonds climbed to a peak of $9,729bn on the 8th of July, when the ten year bond yield reached a record low of 1.36%. By 8 November, before there was any indication of the surprise election result, this value had already fallen to $9,507bn. As of yesterday, the number was $9,296bn. So most of the fall since the summer preceded the new president entirely.

More broadly the invocation of a “Trump thump” is a symptom of the behavioural concept known as anchoring. We had become very used to both the recent level of bond yields and the pace of their rise before the election, so the sudden change shocked us into thinking that something anomalous had occurred: in this case, a dramatic change in policy direction arising from the victory of a candidate from left field.

This is at best a partially misleading analysis. Inflationary pressure has been mounting – and disinflationary forces have been receding – for some time. Look at the prices of base metals and freight and global activity seems to have been picking up over the second half of this year too. What is strange – perhaps – is that bond yields remained at record lows for such a long time. Putting it unkindly, bond markets have often seemed to care much more about the last ten weeks than the next ten years. There is a case to be made that the so-called “thump” was no more than a catalyst to their ongoing recovery from inertia.

Time for some more context. Yes, the US 30-year yield has risen by its fastest pace since at least 2009, putting on 40bp in four trading sessions starting last Wednesday week. But it has since spent the whole of this week hovering around the 3% mark. The initial spike was unusually volatile, but taking a slightly longer view the 30-year yield has now risen by about 1% in total since its July low – and did exactly the same thing over a similar period in H1 2015.

Look at current pricing in absolute terms and 3% is not even a high number. Trump has only managed to thump the 30-year Treasury yield back up to where it ended last year. It is almost exactly in line with its five-year average. And this is still miles below the 5.3% it posted on the cusp of the credit crunch (21 July 2007).

From another angle, a 3% return for thirty years looks plausible in real terms if we focus on the most recent American CPI data (last in at +1.6%). But long run expectations according to the University of Michigan survey are closer to +3%, and the 21st-century average prior to the Great Recession was +2.8%. On that basis the election result has only delivered US investors a prospective 30-year real return of 0.0-0.2%. In fact if one really wanted to get bearish on bonds one might observe that these levels of inflation would, not so very long ago, have been regarded as unachievably benign in any kind of growth-positive environment for the US economy. That is why the bond market has been able to rally to new highs year, after year, after year since inflation peaked at 15% in 1980.

So from a politically detached perspective, perhaps we should forget about Mr Trump’s impact on the US bond market. Fundamentally speaking he has taken the stage as accomplice, not assassin.

What we oughtn’t to do, of course, is forget about the possible impact of bond markets . . .

18/11/2016 at 5:23 pm

Taking A Hike

Well that clinches it, surely. Today’s US data showed the unemployment rate down again to 4.9%. Payroll growth continued at a strong pace, with non-farm jobs up by 161,000 last month. Both these prints came out in line with expectations – but wage growth beat every estimate going, hitting a new post-recession high of +2.8% on the year. Purchasing manager surveys out over the last couple of months suggest that the rate of job creation will accelerate into the end of this year if anything. The American labour market is showing clear signs of warmth. Surely, a Fed hike next month is certain.

This chimes with the consensus view. Of the 66 forecasts currently made available to Bloomberg, 15 expect no change and all the rest are for a 25bp hike. The interest rate markets also expect the Fed to see out 2016 with a target rate of 0.75%, then go on to hike again around the middle of next year.

So far, so uncontentious. Indeed it is reassuring from an investor’s perspective that the market reaction to somewhat firmer expectations for interest rates has, thus far, been sanguine. Halfway through this year a December hike had yet to be priced in; by the autumn the eurodollar futures market had become unequivocal on the subject – Treasuries sold off too – but the S&P 500 still rallied, turning in its strongest quarterly performance of the year so far.

The key word there is: “somewhat”. In the US as in Britain there is now a real risk that tightening occurs more quickly than people think.

That +2.8% wage growth is part of the reason why. A connected reason is that the energy sector has recovered some of its strength this year, taking away a recent source of downward pressure on activity and employment. Then there are import prices: stable oil and a stable dollar have now closed off that source of deflation. Core CPI has already been running at its strongest sustained level this year since the Great Recession. Both the headline CPI measure and the consumption deflator used to calculate chain-weighted GDP have been catching up. Finally, unreliable indicator as it is and completely unfashionable as it has become, broad (M2) money supply growth is running at its fastest pace for nearly four years.

The question to which nobody knows the answer is: will the labour market start really overheating and, in the circumstances, contribute to an uncomfortable level of inflation? At the moment, US policymakers are split on the subject, but the Fed’s actual monetary response to date, together with the interest rate markets’ pricing, implies a near-total lack of concern.

Another wild card is our old friend political risk. At present, polling at the national level and in some of America’s “battleground states” suggests that Secretary Clinton is on course for a narrow victory. If Mr Trump were to pull off a surprise win, however, it is not just the market response but the economic consequences which could be significant. There has already been extensive coverage of the effect that the candidates’ fiscal policies might have on the national debt, but consider some of the Republican candidate’s other measures: the expulsion of migrant labour, swingeing tariffs on imports, less accommodative trade agreements (as well as big tax cuts for businesses and households). All of these would be inflationary.

It would be imprudent to expect a crisis. But the possibility of a problem is clear and what matters to us as investors is that this is not recognised – indeed, quite the reverse. Bond markets think that inflation over the next ten years will run at an average of 1.7%, below the 2.1% they have priced in on that horizon over the last 15 years. Consumer expectations for near term inflation, as measured by the University of Michigan survey, are below average too, and for long term price behaviour are at their lowest ever level.

So there could well be a surprise or two in store. And whatever its scale, this ought to have consequences for portfolio construction.

04/11/2016 at 4:32 pm

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