Has global inflation really been brought under control? Many trading experts express deep doubts and are quietly "making contingency plans"

As concerns about economic recession rise, market inflation indicators are trending downwards, and bond traders are increasingly confident that inflation will eventually be brought under control.

Current data, including benign inflation data from the United States and the United Kingdom, suggest that after years of tight monetary policies by global central banks, price pressures are easing.

Nevertheless, some investors are starting to doubt the control of inflation and are actively building protective measures to cushion the impact of fixed income investments from inflation shocks.

Some analysts believe that with interest rate cuts now a certainty, economic recession has replaced inflation as the primary concern. This positive news has led to a significant drop in benchmark bond yields, but it seems to have dropped too much.

John Bilton, Head of Multi-Asset Strategy at J.P. Morgan Asset Management, stated:

"We believe fears of an economic recession have been exaggerated, but the inflation risks at current yield levels may be underestimated... Given 'a few factors that could push up inflation,' I am maintaining an 'overall neutral' stance on term or rate risk exposure."

Stubborn Evidence of Inflation "Stands Out," Investors Rush to Make "Preparations"

Although price growth has significantly fallen from the highs during the pandemic, the decline path is not smooth, and inflation in certain regions proves to be stubborn. The strong July retail sales data in the United States, along with threats such as shipping disruptions, Middle East turmoil, massive public spending, etc., all increase inflation risks. Therefore, some investors believe that hedging is necessary.

Central bank governors around the world are also emphasizing the need for vigilance, even as they shift their focus to growth risks and signal rate cuts.

Asset management companies like Amundi and RLAM are buying hedging tools to guard against future price increases. Wall Street strategists also recommend taking advantage of the market's declining expectations for future inflation to cost-effectively build protection.

Marie-Anne Allier, who manages a €5.6 billion fixed income investment portfolio at Carmignac, believes that the market is too optimistic about inflation prospects and has implemented hedges through derivatives linked to euro and U.S. inflation for three- and five-year periods, as well as bonds linked to Spanish inflation for three years. She stated:

"If inflation rises again or becomes more stubborn, it could disrupt investors' portfolios, especially those exposed to term risk."

Some investors also believe that inflation indicators may be falling too quickly. For example, the U.S. five-year breakeven rate has dropped significantly in recent weeks due to heightened concerns about economic recession, currently falling to around 2% for the first time since early 2021.

Analysts suggest that a critical moment in the short term may occur shortly after the U.S. election, where if Trump wins, his campaign agenda of tax cuts, tariff increases, and immigration crackdowns could bring inflation risks.

Recently, Citigroup initiated a long position in U.S. 10-year treasuries, with a breakeven point slightly above 2.10%, remaining unchanged from last Friday. Strategists expect that as the Fed begins to ease policies, long-term inflation expectations will rise

Significant Disparities in Global Markets, Soaring Inflation Concerns

On an international level, price data in many developed countries remains high. Australia has nearly ruled out the possibility of a rate cut in the next six months as the inflation rate stands at 3.8%, while inflation in the Eurozone unexpectedly accelerated in July. Barclays strategists suggest preparing for the future rise in Eurozone inflation through short-term swaps.

Even Japan, which has escaped decades of deflation, is causing concern among investors. Roger Hallam, Global Rates Chief at Vanguard, stated that the company is cautious about Japanese bonds and UK government bonds as the UK's core inflation rate remains at 3.3%.

Analysts suggest that in the long term, structural changes in the global economy, such as addressing challenges like climate change and aging populations, along with rising government deficits, imply that inflation and interest rates may enter a higher range.

Amelie Derambure, a fund manager at Amundi SA, stated:

"It is correct for the market to take advantage of the deflationary trend in the short term, but the medium to long-term outlook is full of uncertainties."

Divergent Views on "To Hedge or Not"

It is worth noting that while some view long-term inflation as a risk, there are still divergent opinions on whether to hedge against it.

Some caution against hedging too early with inflation-protected bonds like TIPS, as returns may be suppressed. Erik Weisman, Chief Economist and Portfolio Manager at MFS Investment Management, believes:

"If the so-called hard landing becomes a reality, the US profit-loss ratio could shrink by as much as 100 basis points."

Furthermore, after the surge in prices of inflation-protected bonds in 2022 led to significant losses, there are underlying doubts about the actual level of protection they provide.

However, Tim Foster from Fidelity International stated that these bonds have proven their long-term value, with data showing that over the past 25 years, 1 to 10-year TIPS outperformed nominal bonds for 17 years and are expected to outperform again in 2024. He also pointed out:

"The market often fails to consider the risk of rising inflation, with the likelihood of unexpected outcomes far greater than lower-than-expected outcomes... If investors become complacent about inflation, it wouldn't be the first time."