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Inflation Poses High Risk for Investment-Grade Bonds

The “likelihood of a mid-cycle correction is high,” particularly in the early part of next year, according to Morgan Stanley.

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With inflation fears rising and interest rates looking increasingly likely to be hiked soon, investment-grade corporate bonds are at high risk of getting hit in the coming months, according to Morgan Stanley.

The Federal Reserve is more likely to hike rates sooner after last week’s U.S. inflation report, and an index of expectations for future bond yield swings has reached its highest level since April 2020. With current high valuations, there’s little room for error, and even slight stresses can weigh on returns, Morgan Stanley strategists including Srikanth Sankaran wrote. On top of that, corporate earnings are increasingly at risk from supply-chain problems and wage pressure, the strategists wrote.

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