There are signs that markets are beginning to awake to the prospect that inflation might be out there, although it may not be a risk this year, according to GSFM.
Steve Miller, adviser at GSFM, said bond yields had risen, albeit modestly, but curves had steepened and market expectations on inflation had started to creep up.
“I’m not forecasting inflation, only highlighting it as a risk – we can worry about inflation but perhaps it’s not 2021 when we need to worry about it,” Miller said.
“Even when the unemployment rate was at a 50-year low in the US, we didn’t see any signs that inflation was accelerating.
“Whilst inflation is a concern, it’s more of medium-term nature, rather than a near-term cyclical nature.”
However, he said markets had entered the year in a “cheery disposition”, based on faith in macro policy being delivered.
“Monetary policy has been important, but the challenge obviously for 2021 will be to get that fiscal follow through,” Miller said.
He said fiscal policy would go beyond the markets as it would help the disconnect between the markets and the real economy – the difference between Main Street and Wall Street.
“Fiscal policy will be important in repairing that and it can attack some of the less desirable distributional outcomes that have emerged from an emphasis on monetary policy to start with,” Miller said.
“Fiscal policy can manipulate distributional outcomes that might be otherwise considered adverse consequences of the monetary support.”
According to FE Analytics, within the Australian Core Strategies universe, the global bond sector returned 4.29% since the start of 2020 to 30 November, 2020.
The most common benchmark was the Bloomberg Barclays Global Aggregate bond index which lost 0.51%.
Performance of the global bond sector and Bloomberg Barclays Global Aggregate index over the year to 30 November 2020
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