Speaking in Sydney yesterday, AllianceBernstein (AB) portfolio manager John Taylor said inflation pressures are likely to build over the next 12 months.
However, central banks' tolerance for higher inflation is "pretty good", which makes the likelihood of rate hikes in response to higher inflation unlikely, he said.
"Most central banks will embrace inflation being above target for some time. So inflation can rise without the central banks thinking they need to tighten policy in response to that," Mr Taylor said.
AB is currently increasing its exposure to inflation-linked bonds, a sector that Mr Taylor said the market is "mispricing" at the moment.
"If I look at the inflation break-evens in the US, they’re probably underestimating what we think they will be by about 100 basis points," he said.
Japanese bond markets are also pricing in a "pretty low probability" of any inflation coming through, which Mr Taylor believes is a mistake.
There is some scope that central banks around the world could have their 'Goldilocks' scenario: a combination of higher inflation, higher growth and lower bond yields, which can help governments "inflate away some of their debt".
That's why AB believes there is unlikely to be a bear market in bonds anytime soon, he said.
"In that kind of environment, it’s difficult to see bonds selling off aggressively over the next 2-3 years," Mr Taylor said.
"After that, I think there’s a chance that bond yields will move higher."
But in a world where potential global GDP is moving down and the population continues to age (sustaining demand from pension funds), there is a cap on how high bond yields can go, Mr Taylor said.
"So any moves higher in yields are more likely to be a couple of hundred basis points rather than back to where we were say 10 years ago," he said.
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