Inflation remains main concern for bond investors

RIO DE JANEIRO, BRAZIL – Inflation remains at the top of the list of concerns for investment-grade bond investors in Europe as doubts about the pandemic also grow, according to a Bank of America survey published Friday, August 13.

Price increases were the main source of concern for investors in the survey, similar to the preceding edition published in June.

Market players are increasingly concerned about the impact of inflation on corporate margins, and not only about the European Central Bank raising interest rates, according to BofA strategists led by Barnaby Martin.

In addition, Covid-19 is again a concern despite higher global vaccination rates. Some 25% of respondents investing in investment-grade credit cited coronavirus and new variants as a top concern compared to 6% in June.

The persistence of the pandemic is the main concern for high-yield bond investors, who are much less worried about inflation than those investing in investment-grade credit.

Despite the concerns, investors continue to purchase bonds due to a lack of alternatives, according to the survey. Nevertheless, overweight positions, an above-average recommendation, have been reduced in sectors such as finance, as values and yields look increasingly high.

Defaults are not a concern for investors at the moment, the survey found, despite corporate insolvencies in the UK rising 31% in the second quarter, the largest quarterly jump in percentage terms ever recorded, according to Bank of America strategists.

Banks, insurers, pension funds, asset managers and hedge funds were among the investors surveyed with 60 participants this month, according to BofA.