Rising inflation rates are also driving the bond markets.

The pandemic has disrupted supply chains and other economic activities, among other things.

Now the restrictions caused by Corona are gradually being removed, and the surge in demand around the world is causing prices to rise.

“These pandemic-related distortions are likely to persist for a while,” says Christian Kopf, head of portfolio management for pensions at the fund company of the Volks- und Raiffeisenbanken, Union Investment.

Tim Kanning

Editor in business.

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    The pandemic not only left its mark on actual price developments - American core inflation, i.e. inflation excluding energy and food prices, rose more sharply in April than it has been since 1996.

    It has also raised expectations of future inflation developments on the capital market.

    Compared to the low point in spring 2020, inflation expectations have risen significantly and are now at a multi-year high, as Kopf emphasizes.

    At the same time, however, interest rate hikes are only expected in the distant future.

    For example, the market does not expect the US Federal Reserve to raise interest rates before the second half of 2022 due to the negative long-term consequences of the corona crisis.

    Kopf recognizes a “new pair on the capital markets”, consisting of rising inflation on the one hand and a lack of interest rate reactions from central banks on the other. In his view, inflation rates will remain volatile and difficult to interpret for much longer. In the short and medium term, he expects bond prices to continue to fluctuate more widely. This can have unpleasant consequences, especially for a bond portfolio that serves to cover liabilities that are linked to inflation, such as wages. Here Kopf recommends so-called inflation swaps, with which unexpectedly high inflation rates can be counteracted.

    Inflation-linked bonds can also be attractive to traditional investors. As a current study by the investment company Nomura Asset Management shows, this asset class has recently achieved even higher returns than conventional bonds. They are therefore among the best-performing segments in the bond market so far this year. With a positive performance of 0.8 percent, they clearly outperformed German government bonds (minus 3.2 percent) and American government bonds (minus 3.5 percent), for example.

    According to the evaluation, the gap is even clearer if you look at the past three years.

    Across the world, the so-called linkers achieved an increase of 14.2 percent between May 2018 and May 2021, calculated in euros, while the global bond markets, including investment grade corporate bonds, only rose by 8.5 percent.

    Those who only invested in German government bonds achieved a return of only 3.6 percent, and US government bonds brought in 8.7 percent.

    "You would have had to take the risks of high-yield bonds in order to generate more income on the bond markets over the last three-year period than with inflation linkers," says Sönke Siemßen, who heads customer portfolio management at Nomura.