After a two decade long bull market for bonds, it's easy to forget that this was a hard won victory. In the 40 years prior to 1982, US bond investors lost money in inflation adjusted terms in 30 of them - in 1980 alone they lost 23% in "real terms". It was then the "bond vigilantes" rebelled and swore to keep central banks and governments honest by raising long term interest rates whenever the authorities kept their own interest rates too low, or let budget deficits grow out of control. Since then US inflation has fallen from over 10%, to under 4% today, and similar declines have been seen globally. So was this down to the bond market's enforcement of monetary and fiscal discipline, or were other factors at play - improvements in technology, globalisation, the China effect, and demographics? And given the recent increases in oil and commodity prices - and in the UK hikes in utility bills, council tax bills and tuition fees - have the “bond vigilantes” become complacent after such a long period of price stability?

This blog will allow me and the rest of the M&G bond team to share our thoughts on these developments in inflation and interest rates.

We also want to share our views on other areas of the bond markets – in particular the corporate bond and high yield markets which have developed rapidly over the past decade, and are now some of the most important asset classes within retail investors’ portfolios. Being vigilant is not just about keeping central banks honest, but also about looking for deteriorating trends in credit quality so that we can move into higher quality assets ahead of any increase in company default rates.

Finally we’d like to use this space to highlight news stories that have interested us, websites that have happily wasted our time and other trivia that may, or may not, be bond related. In addition we’d be interested to hear your own views on markets and inflation, so please email us with your comments and thoughts.

Jim Leaviss
Head of Retail Fixed Interest
M&G Investments
bondvigilantes@mandg.co.uk