The inflation specter is hanging over markets again, and it may be the most boring investments that end up shielding your portfolio from its effects, Wells Fargo says.
The investment bank said it’s eyeing one area of the market in particular where investors could find safety amid fears of sticky inflation: short-term fixed income. It’s an area the bank says looks primed for steady gains in an environment where inflation is running higher and interest rates remain elevated, Brian Rehling, the co-head of global fixed income and digital asset strategy at the bank, wrote on Wednesday.
Rehling pointed to short-term US Treasurys, certificates of deposit, and money-market funds — three short-term fixed-income investments that tend to benefit when short-term interest rates rise.
Here are the yields on some popular investments in the categories Rehling outlined:
“Short-term fixed income looks useful because investors can still earn attractive income without taking as much interest rate risk as they would in longer-term bonds,” Rehling said. “Sometimes the boring part of a portfolio earns its keep.”
Hot inflation and higher rates are generally negative for equities and other risk assets, because they make less risky investments like Treasurys more attractive. Investors were expecting the Fed to continue its rate-cutting cycle this year, but those hopes have been dashed by the Iran war, which caused energy prices to spike and fanned fears about higher consumer inflation.
June’s inflation report came in much cooler than expected, but the Fed has indicated that it’s committed to bringing back 2% inflation, the central bank’s long-running target for price growth that it’s missed for over five years. With the Iran war re-escalating, concerns about energy prices have picked up again as oil prices spike from their recent lows.
Wells Fargo said its base case is for the Fed to keep rates higher for longer, a view that’s become . Markets are pricing in a 90% chance that rates will end the year higher than their current levels, according to the CME FedWatch tool.
