Bondholders beware – inflation is coming, says Jeremy Siegel

Early last year, inflation seemed the last thing to worry about as the pandemic struck and oil prices fell below zero, writes Jeremy Siegel in the Financial Times. Siegel is best known for his 1994 book Stocks for the Long Run (in which he makes the case that long-term investors should buy and hold shares, rather than try to time the market).

However, “those who study data on monetary conditions knew that the unprecedented build-up in liquidity would see the economy boom and prices rise as soon as vaccines” promised an end to Covid-19.

After the 2008 crisis, central banks printed money but it flowed into asset prices rather than consumer prices. Today, the new money is not just going “into the excess reserves of the banking system. It is going directly into the bank accounts of individuals and firms” via various government support schemes. That will have a much more powerful impact.

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“I certainly do not expect hyperinflation, or even high single-digit inflation,” says Seigel. But he does expect it to breach the Federal Reserve’s 2% inflation target for “several years”, which “is not good for bondholders”. US Treasuries – government debt – pay a fixed income, so inflation will “erode the purchasing power of these bonds”, driving down prices. “The multitrillion dollar war on Covid-19 was not paid for by higher taxes... It will be the Treasury bondholder, through rising inflation, who will be paying for the unprecedented... stimulus over the past year.”