Bonds & The Invisible Thief

Watching Inflation Wreak Havoc in Fixed Income

June 2020. Reading Time: 10 Minutes. Author: Nicolas Rabener.


  • US bonds generated positive total returns in most inflation regimes
  • Returns were mixed when inflation was above 4%
  • Real returns were strongly negative when inflation was high


Inflation is like cancer. It largely happens out of plain sight and requires focus to be noticed. The data is not easily understood and the perspective changes frequently. The outlook is difficult to predict. And it typically ruins people’s lives, in the case of inflation, when savings are destroyed, which can happen slowly or suddenly.

Although inflation rages in some frontier markets like Venezuela, Argentina, or Iran, for most investors in developed countries, it is largely a ghost from the past. Given high levels of debt across society and, for the most part, weak demographics, the outlook for economic growth is low. In fact, deflation is more likely than inflation. Japan’s playbook seems to be on deck in many countries across the globe (for our non-US readers, in baseball the term ‘on deck’ refers to being next in line to bat).

Complicating matters, government responses across the globe to the COVID-19 crisis have massively increased global public debt. Currently, markets do not perceive this as a problem. It seems that bond vigilantes are AWOL or powerless. Naturally, investors know that ultimately there is a price to pay for printing money excessively. Plenty of countries like the Weimar Republic in the 1920s or Venezuela more recently have been down this road and it never ends well. It is simply a question of time.

Creating investment portfolios that generate or at least preserve capital through such periods is challenging. Some asset classes like commodities, especially gold, are thought to do well in such an environment. Other asset classes, like bonds, are associated with capital destruction (read Equity Factors & Inflation).

In this short research note, we will explore the performance of US bonds in different inflation regimes.


Most investors in developed markets think of inflation as the annual change in prices that is typically around 2%, which