LONDON - Fixed income managers expect U.S. inflation to stay above the Federal Reserve's 2% target for longer, with two-thirds of investors surveyed by Russell Investments expecting core inflation between 3% and 4.5% over the next 12 months.
The quarterly survey released on Thursday, seen by Reuters before publication, also showed investors divided over when a global recession might begin, with just a third expecting it to start in 2023.
Red-hot inflation prompted the Federal Reserve in June to deliver its biggest rate hike since 1994. Core inflation, which strips out food and energy prices and is keenly watched by policymakers, is running at 6% year-on-year.
Russell said that none of the 59 bond and currency managers who responded to its quarterly survey expected U.S. core inflation to decline below the Fed's 2% target in the coming 12 months.
Less than 5% expect U.S. Consumer Price Index to show the inflation average below 2% in the next five years, Russell said.
The survey also showed 31% of respondents expect a recession to start next year, while 27% expect it to begin in 2024 and 28% expect it later.
"It's really about recession, and inflation and credit risk," said Gerard Fitzpatrick, global head of fixed income at Russell Investments. "Recession risk is coming through but there is division on the timing."
Although recession was a concern, the survey found the main worry for bond managers half-way into the year was stagflation - with 58% of respondents citing stagflation - a mix of high inflation and weak growth - as their primary concern, while 21% picked recession.
Recession risks have risen in recent weeks, with an inversion in the U.S. Treasury yield curve a sign that bond investors are bracing for a sharp growth slowdown.
In investment grade bond markets, 21% of managers said they now expected a moderate tightening of spreads compared with zero at the beginning of 2022. But the survey added that 39% of managers still expect a moderate widening in spreads in the next 12 months, versus 54% in the previous survey.
And on currencies, the Russell survey conducted in June showed fund managers positive on the U.S. and Australian dollars.
The majority expected euro/dollar to trade between $1.01 and $1.05. They saw the top for the currency pair at around $1.15.
The single currency this week slumped to a two-decade low at around $1.01615 and talk of a move to parity has grown.
The survey showed 43% of fund managers saw the British pound as the worst performer among the G10 currency group.
Sterling was firmer on Thursday as an end to political uncertainty appeared in sight. It was last up around 0.8% at $1.2016, but remains close to its lowest levels since early 2020.
(Reporting by Dhara Ranasinghe; editing by Sujta Rao and Tomasz Janowski)