Higher proportion of inflation-linked bonds.

Expectations of future inflation have fallen. Several uncertainty factors nevertheless suggest adjustments to bond investments.

Inflation expectations for the coming years have fallen. However, we consider the probability of inflation falling to pre-pandemic levels to be low. For this reason, the proportion of inflation-linked bonds in Gutmann Portfolio Management has been increased from 6% to 10% of the bond allocation.

The rise in prices for goods and services has slowed in recent months. However, past inflation is not our only consideration. More importantly, we focus on expectations for the future. As evidenced by 10-year German inflation expectations, these too are declining. In this case, they have returned to 2% per year. Rather than surveys of market participants, we base this on prices traded in financial markets.

We assign a low probability to inflation declining further towards 1%-1.5% in 10 year breakeven rates - which in financial lingo refers to inflation expectations - as was the case before the pandemic. Some parameters have shifted that exert longer-term inflationary pressure. Just think of the increased geopolitical risks that are leading to "friends shoring", i.e. counteracting the efficiency of globalization. In addition, labor market shortages persist. Finally, the push towards renewable energies also carries a price tag, potentially fueling inflation.

Clemens Hansmann, head of Gutmann KAG’s bond team: “We are increasing our allocation of inflation-linked bonds at the current lower level of inflation expectations. However, the battle against inflation is not yet over as long as there are no surprisingly strong deflationary developments. It is possible that inflation will remain slightly above the central bank's 2% target due to structural forces such as persisting wage pressure and geopolitical fragmentation.”

Inflation-linked bonds buy today's inflation expectations. If these rise in the future, so-called linkers stand to benefit compared to conventional bonds. Robert Karas, Chief Investment Officer at Gutmann: “With this move, we are increasing the weighting of a segment trimmed since fall 2022 when it accounted for a high 14% of bonds. This does not change the duration of 4.7 years within the bond component. The proportion of corporate bonds will fall slightly from 34% to 32%.”

Please contact your relationship manager with any questions or to discuss your individual investments.