By Dhara Ranasinghe

LONDON (Reuters) – Fixed income managers have ramped up expectations for U.S. inflation and rate hikes in the face of stronger-than-anticipated price pressures, Russell Investments’ quarterly survey of investors found.

On Tuesday, 53 of the most prominent bond and currency managers published a survey that highlighted the problems investors face when evaluating the long-term path to inflation.

In October’s survey, 55% of the fund managers surveyed expected U.S. inflation to range between 2.26%-2.75% over 12 months. This is well above the Federal Reserve 2% target.

Fully 20% of respondents expected that inflation would rise even further.

Contrary to this, about 70% of respondents to the June survey predicted that inflation would exceed 2% in 12 months.

The United States is experiencing inflation at multidecade-high levels. Recent data shows that the Consumer Price Index was at 6.2% for the year to Oct. This represents the largest annual increase since 1990.

Russell’s survey found that around 80% believed inflation would not fall below 2.2% over the next five-years, reflecting investors’ expectations.

In light of the recent money market repricing, fixed income managers have also purchased forward hopes for an increase in Fed rates.

Russell’s prior survey showed that 82% of respondents did not expect the Fed to move by 2023. However, the Q4 survey revealed that half the investors think the Fed will make a move during the second half 2022.

Only 40% of the respondents expected 10-year Treasury yields will trade between 1.61 and 2.2% within the next 12 month, while 42% anticipated yields that would rise to above 2%.

Yields at the moment are about 1.63%.

Gerard Fitzpatrick (global head fixed income at Russell Investments), stated, “A central theme is that managers think inflation will be higher than the Fed’s target.” But managers don’t see super high inflation as an important aspect.

Other concerns raised by bond investors were high-priced valuations, and China’s property industry. Fitzpatrick added that Fitzpatrick was also concerned.

Expectations of European fund managers are much less skewed — 75% respondents didn’t expect the European Central Bank (ECB) to reduce its asset purchases after 2023.

The ECB has resisted market hopes for rate increases as soon as next year, despite the fact that it faces low inflation in the long-term. According to economists, it’s unlikely that the ECB will raise rates in several years.

This has put pressure on the euro, driving it to $1.1226/month.

Russell Poll: 63% expected that euro/dollar would trade in 12 months lower than the $1.16 price it traded at the time of the survey.

This is a significant drop from their June prediction, where around 80% of managers predicted that the euro would trade between $1.21 and $1.30.

Managers of funds said that the Russian rouble and Brazilian real would perform well in emerging markets currencies over the coming 12 months.