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Inflation vs. Bond Yields: Are You Protecting Your Portfolio?

October 27, 2011
by Jack Reynolds

Maybe it is just food, which is one of many inflation components, and maybe food is a small part of your budget, but food inflation is obvious to everyone. The U.S. Dept. of Agriculture expects retail food prices to increase 3.5% to 4.5% this year. According to the Bureau of Labor Statistics, retail grocery prices were 6.3% higher in Sept. than a year earlier. This begins to feel like inflation. See to the Wall Street Journal of Oct. 26th.

On the other hand, a 10-year U.S. Treasury is yielding about 2.1% (as of Oct. 26th).

If retail groceries portend anything about inflation and if 10-year U.S. Treasury yields tell us anything about fixed income returns, then investors should be thinking hard about their asset allocation.

Do you have enough of an allocation to inflation-sensitive assets? What should your allocation be to fixed income? In your fixed income portfolio what should be your average maturity/duration? How much credit quality risk should you embrace in your fixed income portfolio?

These are all matters that you should be fully engaged in reviewing with your private investment counselor.