Funds expect subdued U.S. inflation, strong EM FX – Russell Investments survey

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LONDON (Reuters) – Fixed income managers expect the U.S. Treasury yield curve to steepen in the next 12 months and many anticipate inflation will remain subdued in a 1.8-2.4% range, a survey from Russell Investments showed on Tuesday.

FILE PHOTO: U.S. one dollar banknotes are seen in this illustration taken February 8, 2021. REUTERS/Dado Ruvic/Illustration

Benchmark 10-year U.S. Treasury yields have risen over 70 basis points this year as investors bet on a strong economic recovery that will boost inflation. The U.S. Federal Reserve now targets an “average” of 2% inflation, instead of a fixed 2% goal, giving it more flexibility.

According to the Russell survey conducted in February, 76% of respondents expect U.S. inflation to hover between the Federal Reserve’s target rate of 1.8-2.4%. Just 10% see a deflationary environment ahead, versus 21% in the previous quarter’s survey.

Of the 50 bond and currency managers that responded to Russell’s first-quarter survey, 57% expected the global economy to recover to pre-pandemic levels in 2022.

Bond and currency managers expected investment grade assets will offer the most attractive risk-adjusted returns in the next 12 months, favouring high-yield assets and emerging market local and hard currency debt.

The survey revealed a preference among money managers for the Brazilian real as the most attractive emerging market currency in the next 12 months. Almost 89% expected a positive performance from emerging market currencies.

The real has lost around 6% so far this year against the dollar, underperforming broader emerging currencies though they too are down 0.7% year-to-date.

Russell said 71% of managers expect emerging market FX implied volatility to rise in the next 12 months compared to 57% who predicted higher implied volatility for major currencies.

Investors appear to have become less bullish on the euro, which 61% of managers saw in a $1.21-$1.25 range. Russell’s fourth-quarter 2020 survey showed 73% believed the single currency would trade between $1.21 and $1.30.

The euro was near $1.19 on Tuesday.

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