It appears we are likely to be witnessing an environment of rising inflation going forward, and there is a significant risk this will be accompanied by rising interest rates.
Surely, the United States and most of Europe, with their weakening economies and fiscal crises, cannot afford higher rates.
But they may just have no choice. Waning investor demand for Treasuries - recent 30-year Treasury auctions have been exceptionally weak - on the back of rising inflation expectations and escalating budget deficits (the US budget deficit has more than tripled this year) may simply force governments to offer more attractive terms to investors on their debt.
What investors should do in such an environment of rising inflation and interest rates is avoid being indebted since interest payments would rise in line with higher interest rates.
Also property prices could come under pressure. Investors must also limit or avoid exposure to long-term bonds - the asset class most vulnerable to rising interest rates and inflation.
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