David Randall, Davide Barbuscia

NEW YORK, (Reuters) – Blistering inflation threatens to re-ignite the twin falls in U.S. stocks & bonds. Investors have few options as a Federal Reserve appears to be locked into its strictest policy tightening since decades.

Friday gave a hint of what investors may expect in coming weeks, as the fell more than 2.5% while yields on the benchmark Treasury hit their highest since early May after stronger-than-expected inflation data ramped up expectations for more aggressive Fed rate hikes later this year. Prices are inversely related to bond yields.

“Today’s disappointing inflation data. Ryan Detrick chief market strategist, LPL Financial (NASDAQ), stated that there are many people who still hope for a peak. Investors are worried about inflation fears and potential impacts of corporate profits.

For most of 2018, stocks and bonds were in line with each other as the tighter Fed policy increased yields while drying up risk appetite. Investors who had relied on both the assets and a mixture of them to protect their portfolios from declines have been left frustrated.

These moves were partially reversed in the past few weeks due to hopes that an inflation peak would enable the Fed be less aggressive this year.

Markets now believe that Fed policymakers will increase rates by 50 basis points or more in the three next meetings. However, investors are not expecting Fed dovishness and are becoming less optimistic.

Capital Economics’ analysts said Friday that they doubted that the Fed would ease off its brakes soon, given that U.S. price pressures show no signs of decreasing. We believe that the U.S. stock markets will experience more turmoil as Treasury yields rise and stock market pressure continues to mount.

The S&P is down 18.5% year-to-date, again approaching the 20% decline from record highs that many investors consider a bear market. The yields on U.S. 10-year government bonds, which are a standard for other financial instruments and mortgage rates, have nearly doubled.

Phil Orlando, chief equity market strategist at Federated Hermes (NYSE:), has beefed up cash positions in the portfolios he manages to 6% – the largest allocation he’s ever held – while cutting holdings in bonds. He is overweight in the equity markets that are expected to be benefited by rising prices such as energy.

He said, “You have a very challenging picture for financial market for the next few months.” “Investors must accept the fact that consensus views are wrong, and that inflation remains a problem.

Orlando fears that stagflation will be a market driver. This is a time of low growth and high inflation.

According to BoFA Global Research, 77% expect global stagflation over the next twelve months. This is the highest level of inflation since August 2008.

That white-hot print – which showed consumer prices rising 8.6% in May – is pushing some Wall Street banks to raise forecasts for how much the Fed will need to hike rates to staunch inflation in coming months, potentially maximizing the pain for investors.

Barclays (LON.) Policymakers are expected to announce their first 75 basis point increase in 28 year’s time next week. Goldman Sachs strategists (NYSE.) forecasts 50 basis points increases for each of its next three meetings. These projections were in accordance with the market prices on Friday. Already this year, the Fed raised rates by 75 base points.

Investors don’t expect the Fed to be thrown off its inflation-fighting course by falling equity markets.

BoFA Global Research’s poll before Friday’s CPI numbers showed that 34% global bond investors think the central bank will completely ignore equity weakness, with only a pause if markets turn dysfunctional.

Pramod Atluri is the Principal Investment Officer at Bond Fund of America (BFA) and fixed income portfolio manager at Capital Group. He is one of the bond investors that has reduced duration over the past few weeks. This is because of the portfolio’s sensitivity to fluctuations in interest rates.

I thought that there was a good chance inflation would have peaked at 8.5% and that we would continue to see a downward trend throughout the year. Atluri explained that it has not happened.

We are now at a point in which we wonder if two 50-basis point increases and possibly a third 50-basis point increase is sufficient.