Inflation-linked bonds look attractive over medium-term
December 7, 2018

Ongoing normalization of the global economy will help inflation-linked bonds to outperform their nominal counterparts over the medium term, according to NN Investment Partners (NN IP).

The investment manager says that its analysis shows that the slowdown in longer-term inflation expectations has accelerated over the past months, contributing to an underperformance of inflation-linked versus nominal bonds.

The analysis shows that this year's inflation expectations peaked at 1.8 percent in February. The expectations fell to 1.7 percent by early October and were followed by another drop in November, bringing the indicator to 1.6 percent and the end of last month.

Pieter Jansen, Senior Multi-Asset Strategist, NN Investment Partners, commented: "The weakness of these longer-term inflation expectations can be explained by a combination of factors. One is uncertainty about economic momentum and disappointing economic data, which gives the market less confidence in the inflation outlook. A second is the drop in the oil price, which peaked at the beginning of October and then dropped 32 percent.

"Over the medium term, however, we see more and renewed potential for inflation-linked bonds to outperform nominal bonds as the underlying economic normalisation continues. The oil price-induced decline in long-term inflation expectations may offer a new entry opportunity for longer-term investors, both in the US and Europe."

 





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Ongoing normalization of the global economy will help inflation-linked bonds to outperform their nominal counterparts over the medium term, according to NN Investment Partners (NN IP).

The investment manager says that its analysis shows that the slowdown in longer-term inflation expectations has accelerated over the past months, contributing to an underperformance of inflation-linked versus nominal bonds.

The analysis shows that this year's inflation expectations peaked at 1.8 percent in February. The expectations fell to 1.7 percent by early October and were followed by another drop in November, bringing the indicator to 1.6 percent and the end of last month.

Pieter Jansen, Senior Multi-Asset Strategist, NN Investment Partners, commented: "The weakness of these longer-term inflation expectations can be explained by a combination of factors. One is uncertainty about economic momentum and disappointing economic data, which gives the market less confidence in the inflation outlook. A second is the drop in the oil price, which peaked at the beginning of October and then dropped 32 percent.

"Over the medium term, however, we see more and renewed potential for inflation-linked bonds to outperform nominal bonds as the underlying economic normalisation continues. The oil price-induced decline in long-term inflation expectations may offer a new entry opportunity for longer-term investors, both in the US and Europe."

 



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