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Rising rates, rising risks


After years of negligible rises, Investors have almost forgotten about inflation and its implications on assets. With huge amounts of stimulus of government stimulus around the globe, the risk of inflation is real. Ten year bonds are considered most affected by inflation worries, and you can see recent movements in Australian bonds on the following chart.

10year Australian Government Bond yield

RBC list the following four main reasons as to why:

  1. The economic impact of the pandemic has led central banks around the globe to cut interest rates and buy bonds to inject money into the economy and support growth.
  1. The substantial fiscal stimulus response by governments has rapidly increased the amount of money in the system, stoking demand.
  1. The rapid development of multiple vaccines and a large global vaccination program means economic activity is expected to rise quickly through the summer and into the fall.
  1. Central banks have stated they intend to allow inflation to run slightly hotter than usual before raising interest rates.

These all add to inflation risk.

RBC further note “inflation reduces purchasing power as it erodes the value of cash over time. Things cost more, so you need more money to buy the same things”.

Investors therefore need to consider whether the return on their investments outpaces the rate at which their purchasing power is declining.

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