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Goldilocks faces the three bears – implications for fixed income

BNP Paribas Asset Management (BNPP AM) believes the current signs of strong US inflation could threaten the ‘Goldilocks’ investment environment, and explains what this could mean for fixed income assets.

Absent in the Goldilocks fairy tale, but very real in today’s story, would be a “fourth bear” – inflation – particularly in the US. Inflation risks are indeed skewed to the upside in light of sustained above-trend growth, building wage pressures as companies wrestle with the growing shortage of skilled workers and mounting signs of rising non-labour input costs. This ‘bear’ may be dormant for the time being, but the state of the business cycle and accommodative monetary policy suggests this may not last. BNPP AM’s investment experts here provide an assessment of how this and other threats to the Goldilocks scenario may affect a range of fixed income asset classes. 

Central banks remaining cautious

Most central banks remain cautious as they back away from ultra-accommodative policies. The ECB, for example, has signalled that the tapering of its asset purchases will be followed by an extended period, possibly stretching into the fourth quarter of 2019, of an unchanged policy rate. In addition, any meaningful change to the Bank of Japan’s yield curve control policy seems quite a way off. And the Fed has chosen to largely accommodate fiscal stimulus, accepting the risks of a sustained inflation overshoot in exchange for a prolonged expansion.

Global synchronised growth? Not any longer 

But even with this in mind, it would be disingenuous not to admit that the global synchronous growth scenario has been replaced by one in which a fiscally fuelled and more indebted US economy has moved to the front of the pack. Whether that fuel turns to fumes sooner rather than later, or the US expansion gets a second wind due to higher productivity and trend growth, remains to be seen.

Read BNPP AM’s expert analysis of how the growing, diverse threats to ‘Goldilocks’ may impact upon a range of fixed-income asset classes.

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