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Inflation: Navigating Higher Bond Yields

Political developments in the UK and US have also contributed to a pickup in inflation. The 16% fall in Sterling since the UK referendum has led Citi analysts to raise their 2017 and 2018 CPI inflation forecasts for the UK to 2.7% and 3.4% respectively, up from 0.6% in 2016. Meanwhile, following the election of Trump as US President, Citi analysts note that the combination of fiscal loosening, trade restrictions and anti-immigration policies could raise US inflation.

Expectations of rising inflation have driven bond yields higher but policy and growth uncertainties are reasons to still own bonds. Investors would need to keep bond durations shorter and be more selective.

Key takeaways

  • Citi Analysts forecast 10-year US Treasury yields to reach 2.60% by end-2017
  • Bond investors may want to consider keeping bond duration shorter, at around 7 years
  • Look for opportunities in US corporate bonds, European banks as well as the global metals and mining sectors
  • Within equities, rising yields are expected to benefit the financial sector

 

 

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