Big Question: How are you positioned as we head into a global inflationary environment (part III)?
While we acknowledge we are firmly in the midst of a reflationary environment, we are somewhat less sanguine on the medium-term outlook for inflation relative to market expectations, as positive base effects from energy prices begin to drop out of year-on-year headline indices and core inflation indicators globally remain subdued.
To reflect this, we have maintained a relatively balanced position across global rate and credit markets accompanied by several moderate inflation hedges.
Firstly, we remain invested in global sovereign bond markets (albeit with an underweight allocation), have hedged part of our US duration exposure via payer swap options and put options on long-dated US treasury bonds.
Secondly, in the index-linked markets we have small positions in shorter dated US treasury inflation-protected securities and UK inflation-linked gilts.
Finally, over the past year we have built positions in higher yielding assets with attractive levels of real income in US sub-investment grade bonds and emerging market debt – our most recent addition has been to the short dated emerging market high yield sector.
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