# Fund manager's report
Inflation expectations have increased sharply since the beginning of the year under the influence of multiple factors:
The baseline effect on oil prices, which is at its strongest for more than 10 years (+250% in spring) is the principal reason. Shortages, especially of secondhand cars in the US and goods containing microprocessors are a second factor driving prices up.
Finally, the massive programmes supporting demand with fiscal spending coupled with the reopening of the services sector, especially tourism, is another explanation for this.
These factors appear to be transitory, but the market’s attention has been focused on the unconventional monetary policy plans that some believe are the cause of this inflation...
The consequence is a surge in market inflation expectations of a scale not seen since 2009. The US 5-year breakeven inflation rate even hit a new all-time high in May, close to 2.7%.
The eurozone is not far behind, with inflation expectations at their highest since 2018. Likewise in the United Kingdom, where inflation breakevens are at the same level as they were after the referendum on the Brexit issue...
Although there is clearly a wave of euphoria on the inflation-linked markets, we have not seen fit to position portfolios on the downside of market inflation expectations at this time for the following reasons:
Historically, the upward trend in realised inflation supports rising inflation expectations. This peak is expected during the summer in the US and between October and November in the eurozone.
Month-on-month inflation figures that result directly in the form of carry for inflation-linked bonds are particularly strong, making carry on short positions very costly.
Finally, central bank purchases are disproportionate. The US Federal Reserve is currently buying nearly 40% of the inflation risk supply and the European Central Bank more than 80%.
We therefore prefer to position on the upside of real yields of 5 years or more, with a current preference for 10-year maturities, over short positions on inflation breakevens.
Economic indicators in recent months confirm that the economic recoveries are robust thanks to the extraordinary support measures implemented during the crisis, which brings the central banks a little closer each day to the normalisation of their monetary policies and as in 2013 will push up long-term real yields.
The longer the central banks delay in normalising their unconventional measures, the greater the response could be in the long run (the Optimal Control Theory defended by Janet Yellen when she took over the US Federal Reserve in 2014) which reinforces our position.
Finally, real yields could be driven up by a structural rebound in “neutral yields” as a result of the implementation of fiscal policies in developed countries since 2016 that are much more lax than we have seen in recent decades.
In conclusion, although the rise in inflation is a problem in the short term, we believe that market valuations are largely beginning to integrate this phenomenon and we are seeing a risk/return ratio that is much more favourable to positioning on the upside of medium/long-term real yields.

Translation (ENFR, 2021-05-28):
# Commentaire du gestionnaire
La performance des parts Redex est positive au mois de Mai. L’indexation à l’inflation a été le principal moteur de performance, les chiffres d’inflation sont effets robustes depuis le début de 2021 sous l’effet de plusieurs facteurs : L’effet de base sur les prix du pétrole qui est le plus fort depuis plus de 10 ans (+250% au printemps) est le principal moteur
Les pénuries et en particulier celles sur les voitures d’occasion aux USA et les biens contenant des microprocesseurs sont un second élément qui poussent les prix à la hausse
Enfin, les vastes programmes de soutien à la demande par les dépenses budgétaires couplés à la réouverture du secteur des services et en particulier du tourisme est une autre explication.
Les anticipations d’inflation ont été en hausse pendant les 10 premiers jours du mois de Mai avant de fléchir pour terminer le mois proche de l’équilibre, les données économiques solides permettant d’entrevoir une éventuelle normalisation à venir de ma politique monétaire qui pourrait peser sur les anticipations d’inflation.