Inflation and Rate Rises: The Known Unknowns
Written by Mark Johnson
Editor, Euromoney Conferences

Bond buyers know inflation is going to bite them, but they are not sure how, they do not know when, and – most importantly of all – they are uncertain as how to protect themselves.

That was the message from Euromoney’s 8^th Real Return conference, held in Paris this week.

Sure: inflation-linked bonds are back with a vengeance as issuers take advantage of pensions funds, insurance companies and asset managers looking to hedge rising prices. Breakevens – crudely, the difference between real and nominal bond yields, and hence a market proxy for inflation expectations are sharply up from financial crisis lows.

But investors face a host of unknowns. Will central banks, stung by criticism of being asleep on the inflation watch, snap back with a vengeance? Yesterday’s rate hike by the ECB suggested, that in one key market at least, the answer was ‘yes’. If so, how would that response be sequenced with any need to maintain unorthodox central bank polices aimed at shoring up febrile economic recoveries, ailing banking systems and damaged markets for government debt?

More unsettling still was the widespread sentiment that the financial and economic crisis had made it much harder for central banks to rely on once-trusted inflation measures such as real-economy output gaps. All of which suggests that bond buyers should hire more protection in the form of inflation-linked bonds.

Except –and this is a big except – as central banks hike rates to combat the inflation genie, bond portfolios will be trashed. Linkers ought to provide insurance, but the laughable level of current yield on offer is unlikely to keep customers happy. Little wonder than that bond buyers are shortening duration and fishing in already busy seas such as corporate bonds. A rocky ride is ahead.

Euromoney Welcome: John Bascott, Director - Capital Market Conferences, Euromoney Conferences	Keynote Address: Philippe Desfosses, Chief Executive Officer, ERAFP
Workshop hosted by Nomura: Anthony Morris, Managing Director, Fixed Income Quantitative Strategy	Workshop hosted by UBS: Dariush Mirfendereski, Managing Director and Global Head Inflation-Linked Trading
Workshop hosted by Societe Generale and Investment Banking: Dan Haehnel, Trader, Inflation Exotics and Jonathan Levy, Inflation Exotic Trader	Panel II - The French Inflation Market
Panel III: Inflation-Linked Bonds: An Investors' Panel	Panel IV: Inflation-Linked Bonds: An Investors' Panel