Recent UK consumer price index (CPI) data showed shopping baskets are getting more expensive. That’s bad for consumers on a budget and for investors it reflects one of 2021’s stand-out themes: after a long absence, inflation is back.
The behaviour of bond markets in the face of this threat is one of the main determinants of returns for all asset classes, this year and beyond.
Sovereign government bonds from issuers with stable economies and currencies are considered free of default risk, but there is still volatility. Future cash flows from bonds are fixed, comprising regular coupon payments (the interest from a bond) and the redemption of the principal sum lent to the issuer.