A study of fund managers focused on fixed income investments, such as government bonds, investment-grade credit and emerging market debt, suggests that they are not in panic mode about inflation, but do expect central banks such as the Fed to pull the rate hike trigger in 2022.

A survey of 53 bond and currency managers by US-based Russell Investments shows that most of them (55 per cent) predict US inflation to move in a band between 2.26 per cent and 2.75 per cent over the next 12 months while one in five (20 per cent) reckon it will rise faster than this.

The survey comes at a time when the risk of rising inflation and associated rises in interest rates have grabbed headlines. US consumer price inflation for October came in at 6.2 per cent year-on-year, the kind of number that has prompted concerns that the world’s largest economy could reprise the high price moves of the 1970s and 1980s. One debating note this publication has heard is whether inflation is a temporary problem, created by COVID-19 turmoil, or more permanent.

The survey by Russell Investments showed a shift in views on timing for the first increase for the US Federal Reserve funds rate. Half (50 per cent) of respondents now expect the Fed to make its move in the second half of 2022, versus 80 per cent in the second quarter survey this year who said that they didn’t expect the Fed to begin lifting rates until 2023.  

“Inflation proved to have a bigger bite than previously thought, forcing managers to consider the prospect of earlier interest rate rises,” Adam Smears, head of fixed income research at Russell Investments, said. “However, our survey indicates fixed income managers believe inflation will stay roughly under control in the long term and inflation effects will be transitory. Time will tell if managers have this correct.”

Among other views, the survey showed that 42 per cent of respondents expect the 10-year US Treasury bond to trade between 1.61 per cent and 2 per cent in the next 12 months, with another 42 per cent expecting rates to trade above 2 per cent in the year ahead. Views are considerably more spread out now versus the last survey in June, the firm said.

On investment-grade credit, 30 per cent of respondents expect a moderate widening in yield spreads over the next 12 months, while 60 per cent expect spreads to hold in ranges. Among regions, Europe (ex-UK) replaced the US as the most attractive for returns.