Double whammy of rising interest rates and inflation risk has investors fretting

Investors are being forced to reconsider the yield they get from their investments and whether these yields sufficiently compensate for inflation risk. Picture: 123RF/ JES2UFOTO

The sentiment now is that risk is not being sufficiently compensated for and yields are thus rising. Yields on 10-year US bonds, a key indicator, have gone from 0.5% to more than 1.5% in the last year alone. While a single percentage point increase might not seem significant given the trillions of dollars that are physically invested in this asset, the impact is significant.

There is already early evidence that we are headed towards an inflationary environment. The Organisation for Economic Co-operation and Development has lifted its GDP growth forecasts for 2021. In developed markets, purchasing managers’ indices, which track the prevailing direction of economic trends in the manufacturing and services sectors, have risen well above the 50 level, which is considered expansionary .

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