Investment banks as clients to buy cheap inflation hedges

Market-based measures of inflation suggest the rise in price pressures might be some years away, but investment banks are advising clients to pick up cheap inflation hedges.

Morgan Stanley is suggesting US 30-year inflation-linked bonds (linkers), while Natwest is advising buying 30-year UK linkers and 10-year Eurozone inflation swaps, according to Reuters News. 

Colin Harte, multi-asset portfolio manager at BNP Paribas Asset Management said: 

These hedges in many cases look extraordinarily cheap, so why not buy them now? We could wait, then things could start to move away from us.

Indeed, the US breakeven inflation rate, a gauge of inflation expectations, is seen at 1.30, up notably from the low of 0.50 seen in March, but still hovering well below the January high of 1.77. Both the US Federal Reserve and the US government have delivered unprecedented stimulus over the past three months to counter the coronavirus fallout. Even so, inflation expectations remain well below the yearly highs, making hedges look cheap.