Skip to main content
The Globe and Mail
Support Quality Journalism.
The Globe and Mail
First Access to Latest
Investment News
Collection of curated
e-books and guides
Inform your decisions via
Globe Investor Tools
per week
for first 24 weeks

Enjoy unlimited digital access
Enjoy Unlimited Digital Access
Get full access to
Just $1.99 per week for the first 24 weeks
Just $1.99 per week for the first 24 weeks
var select={root:".js-sub-pencil",control:".js-sub-pencil-control",open:"o-sub-pencil--open",closed:"o-sub-pencil--closed"},dom={},allowExpand=!0;function pencilInit(o){var e=arguments.length>1&&void 0!==arguments[1]&&arguments[1];select.root=o,dom.root=document.querySelector(select.root),dom.root&&(dom.control=document.querySelector(select.control),dom.control.addEventListener("click",onToggleClicked),setPanelState(e),window.addEventListener("scroll",onWindowScroll),dom.root.removeAttribute("hidden"))}function isPanelOpen(){return dom.root.classList.contains(}function setPanelState(o){dom.root.classList[o?"add":"remove"](,dom.root.classList[o?"remove":"add"](select.closed),dom.control.setAttribute("aria-expanded",o)}function onToggleClicked(){var l=!isPanelOpen();setPanelState(l)}function onWindowScroll(){window.requestAnimationFrame(function() {var l=isPanelOpen(),n=0===(document.body.scrollTop||document.documentElement.scrollTop);n||l||!allowExpand?n&&l&&(allowExpand=!0,setPanelState(!1)):(allowExpand=!1,setPanelState(!0))});}pencilInit(".js-sub-pencil",!1); // via darwin-bg var slideIndex = 0; carousel(); function carousel() { var i; var x = document.getElementsByClassName("subs_valueprop"); for (i = 0; i < x.length; i++) { x[i].style.display = "none"; } slideIndex++; if (slideIndex> x.length) { slideIndex = 1; } x[slideIndex - 1].style.display = "block"; setTimeout(carousel, 2500); } //

Investors have been increasing their exposure to gold in an attempt to protect their portfolios.

Edgar Su/Reuters

One of the most divisive questions for today’s markets is whether inflation is finally making a comeback after a long absence.

Some investors seem to think so. They’re upping their exposure to inflation-linked bonds and gold in an attempt to protect their portfolios from the threat of a run-up in consumer prices within the next 12 to 18 months.

This week, demand for 30-year U.S. Treasury inflation-protected securities (TIPS) with returns adjusted with moves in consumer prices proved so substantial that the yield plumbed new depths, sinking close to minus 0.29 per cent, according to data from Bloomberg LP. Meanwhile, money has started flowing back in to investment funds investing in TIPS, in contrast to the outflows seen in March and April. Specifically, ore than US$5-billion rushed into these funds in the week ending July 8.

Story continues below advertisement

That came despite a recent stumble in core personal consumption expenditures, the U.S. Federal Reserve Board’s favoured inflation measure, to 1.7 per cent, well below the central bank’s 2 per cent target.

Investors counting on a pick-up in inflation can point to the determination of central banks and governments that are working in unison to minimize financial market turmoil from COVID-19 and to sustain an economic rebound.

Already, a recovery in global trade has lifted the price of industrial metals and oil. Tellingly, iron ore – the steel-making ingredient that is one bellwether of global growth – recently overtook gold in terms of performance this year. Much of this reflects a credit upswing in China that should, in theory, bolster the global economy and corporate profits outside of the U.S., particularly in Europe and emerging markets.

Another potential source of inflation would be a sustained decline in the U.S. dollar. The greenback’s slide from its March highs has boosted commodities and emerging-market asset valuations through a reduction in global funding costs.

It’s not hard to imagine these trends gathering momentum. Governments around the world have turned on the spending taps and the willingness of central banks to step in and tighten policy is low. In addition, a rapid economic recovery still cannot be ruled out. Viewed in this light, one can understand why some investors think the risk of runaway inflation has risen.

More rapid inflation and an upswing in economic activity would facilitate a broader rally in stocks, driving the performance of cyclical sectors and helping to rebalance stock markets that have become heavily weighted toward growth stocks, in general, and technology, in particular.

This would also clip Wall Street’s leadership over other equity markets. Fund managers overwhelmingly agree that the tech trade is primed for a setback given its run of late, and U.S. tech shares have fallen from their elevated perch this week.

Story continues below advertisement

The catch in the inflation theory is that investors have been burnt in the past by expectations of price rises. Following the global financial crisis of 2008-09, predictions that central bank bond-buying programs would fuel hyperinflation proved to be very wide of the mark.

Meanwhile, another possible scenario is that inflation could kick higher without the economic growth to go with it. Instead, the legacy of COVID-19, in terms of high structural unemployment and hefty debt loads – as well as higher taxes and a rising regulatory burden for companies – will suppress economies’ ability to grow.

Analysts at Bank of America have flagged that risk of so-called stagflation, which could entail a tougher time for fixed income and equities. Low fixed rates of interest provide scant protection against higher inflation, while debt-laden companies would be challenged by a combination of rising interest rates and lacklustre growth. That would provide another reason for the current push for inflation-protected bonds and gold.

Already, equities have shown some signs of flagging, with a majority of key cyclical sectors stuck in negative territory this year and also over the past 12 months. Industrials, financials and energy notably lag broad benchmarks such as the MSCI World Index, the Stoxx 600 and the S&P 500. Although there has been a substantial bounce from the lows in March for cyclicals, this illustrates just how cheap some of these companies were looking at the height of the pandemic shock.

Beyond the competing scenarios of reflation and stagflation remains another outcome: more of the same, or an extended period of modest growth and inflation, accompanied by low bond yields and meagre rises in wages.

Sovereign bond yields sitting near their all-time lows are a sign that economic stagnation remains uppermost in the minds of many investors. Bond fund managers are still awaiting evidence that the historic expansion of money supply in recent months will at some point push up prices in the broader economy. Only then will they shift from the disinflationary stance that has held since the last financial crisis.

Story continues below advertisement

© The Financial Times Limited 2020. All Rights Reserved. FT and Financial Times are trademarks of the Financial Times Ltd. Not to be redistributed, copied or modified in any way.

Coronavirus information
Coronavirus information
The Zero Canada Project provides resources to help you manage your health, your finances and your family life as Canada reopens.
Visit the hub

Your Globe

Build your personal news feed

  1. Follow topics and authors relevant to your reading interests.
  2. Check your Following feed daily, and never miss an article. Access your Following feed from your account menu at the top right corner of every page.

Follow topics related to this article:

View more suggestions in Following Read more about following topics and authors
Report an error
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to If you want to write a letter to the editor, please forward to
Comments are closed

We have closed comments on this story for legal reasons or for abuse. For more information on our commenting policies and how our community-based moderation works, please read our Community Guidelines and our Terms and Conditions.

To view this site properly, enable cookies in your browser. Read our privacy policy to learn more.
How to enable cookies