(Bloomberg) — Money managers are flocking to bonds that hedge against inflation amid uncertainty about tariffs and their impact on the cost of living.
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Federal Reserve Bank of Philadelphia President Patrick Harker warned this past week that risks to the economy are rising, in part due to increasing prices. That fear helped spur the Bloomberg Global Inflation Linked Index, a gauge of investment-grade inflation-linked debt in developed markets, to gain about 5% from Jan. 13 through Thursday’s close.
US President Donald Trump has asked the public to bear with him as he seeks to overhaul trade policy, describing the economic pain that’s expected to come with that as a “little disturbance.” Policy uncertainty in the wake of tariff announcements has contributed to a negative shift in sentiment across markets, leading to sharp declines in equities, a weakening in the dollar and outflows in Treasuries funds.
It’s also contributed to falling Treasury yields, which is part of what makes this trade so hard to navigate. But rising inflation is a real possibility now even if many investors are bracing for rate cuts, said Nicolas Trindade, who runs a number of funds at AXA Investment Managers. He expects volatility to increase amid the unpredictable economic strategy.
“The main risk for 2025 is a sharp resurgence in US inflation on the back of tariffs, tax cuts and immigration restrictions that could lead the Fed to open the door to hiking interest rates again,” he said. “The market is definitely not priced for that.”
And looking deeper in bond markets, there are signs that investors are worried about price changes across the economy. Short-term inflation expectations have risen above longer-term ones.
Inflation-linked bonds are a “great option value” in case prices creep back up, Bridgewater Associates Co-Chief Investment Officer Bob Prince wrote in a note this past week. Bank of America Corp. strategist Mark Capleton, meanwhile, expects strong retail interest in shorter-dated Treasury Inflation Protected Securities funds because of the risks from tariffs and other policy uncertainties.
The bonds also typically have longer duration, which can help fuel gains if yields fall.
The latest rebound follows a tough year. In 2024, the inflation linked bond index fell nearly 4%, the most out of Bloomberg’s 20 key fixed-income benchmarks.
Trump’s request for the nation’s backing comes as subprime car owners miss monthly payments at the highest rate in more than 30 years, jobless claims are high by at least one measure, and housing demand faces headwinds from high borrowing costs. Businesses and consumers are already becoming more cautious, with some companies on the west coast pausing investment decisions as they wait for clarity on fiscal and regulatory policy changes.
As the Trump administration’s plans for tariffs shift regularly, money managers continue to prepare for potential turmoil. Investors have been “aggressively buying downside protection” with volatility index call volume and S&P 500 put volume buying near record highs, Apollo Global Management Chief Economist Torsten Slok wrote in a note on Friday.
Still, corporate credit markets remain largely calm for now. Risk premiums on US high-grade corporate bonds have widened since the end of January, but are below the average of the last decade of about 1.2 percentage points. US leveraged loans have been gaining.
Oaktree Capital Management Co-Founder Howard Marks remains positive, writing in a March 6 note that credit is fairly priced in relative terms and offers a better deal than equities even at today’s spreads.
Mars Inc. sold $26 billion of US high-grade bonds to help fund its acquisition of rival foodmaker Kellanova, in the biggest US corporate bond sale of the year. The bond sale had a record final order book, and the note rallied after being sold.
Walgreens Boots Alliance Inc. agreed to be purchased by Sycamore Partners for $10 billion, turning one of the oldest, most recognizable US drugstore chains into a private company.
Global corporate bond spreads widened for 10 trading sessions in a row through Tuesday’s close, signaling that a period of remarkable tranquility may be coming to an end as investors turn defensive amid tariff fears.
Bond investors are growing more concerned about the impact of US tariffs on automakers, causing their bond prices to lag behind the broader universe of high-grade bonds.
Country Garden Holdings Co. missed a self-imposed target date to reach a deal on its debt restructuring plan, as the defaulted builder struggles to gain support from creditors.
Synopsys Inc. sold $10 billion of investment-grade bonds to help fund its $34 billion acquisition of Ansys Inc.
Chinese technology firm Baidu Inc. is offering as much as $2 billion in bonds that are exchangeable into the Hong Kong shares of online-travel agency Trip.com Group Ltd., matching the biggest ever dollar offering in the format by an Asian issuer.
Britain’s Southern Water Ltd. is trying to fix its finances in an effort to preserve its investment-grade status, safeguard its balance sheet — and avoid the same debt woes as Thames Water.
Secured creditors to Altice France initially opposed to the company’s restructuring deal have now agreed to sign up to it.
Tropicana Brands Group, facing a liquidity crunch as juice sales lag, is considering competing offers for a cash injection from new lenders and holders of its existing debt.
City Brewing Co., which makes alcoholic drinks such as White Claw and Pabst Blue Ribbon, is talking to creditors about inking an out-of-court restructuring with lenders taking control of the company.
Former Ares Management Corp. partner Scott Graves has launched Lane42 Investment Partners, a new alternative asset management firm, with $2 billion in capital commitments from Millennium Management.
Charlotte Conlan, one of the most well-known figures in Europe’s leveraged finance market, is set to retire from BNP Paribas after a 25-year career at the bank. Conlan, who is also chair of the Loan Market Association, is set to retire on March 21.
Wellington Management has hired a team of four fund managers from Pacific Investment Management Co. to build a new private real estate credit platform. Ravi Anand will become head of private real estate credit in New York and lead the team, while Zeyu Chen, Michael Chen and Lucas Dias-Lam are also joining.
HSBC Holdings Plc’s co-head of leveraged and acquisition finance for Asia Pacific, Rachel Watson, is stepping down by the end of March. Ashish Sharma, who shares the co-head position with Watson, will become sole head of the team.
Jefferies Financial Group Inc. has hired two senior executives as it seeks to expand its private credit business in Asia. They are Ali Abbas Alam, formerly managing director at Ares Management Corp., to become head of Asia private credit, and Mani Joseph, previously a managing director at Barclays Plc, who joins the private credit and special situations sales business in Asia.
