Echoes: For bond investors, inflation is a disease worse than Covid

Francois Collet, PM and CIO at DNCA, reveals what it was like managing a bond portfolio through the height of the pandemic shutdowns, and how investors in fixed income should think about risk and the global macroeconomic environment in an era of unthinkable shocks.

The dotcom bubble of 2000 and the 2008 global financial crisis are each defining market moments. From your perspective, what stands out most over the past quarter of a century?

Francois Collet (FC): They are all significant in their way, but for me, the Covid crisis in 2020 was the most distinct. Previous crises, such as Lehman’s collapse or the eurozone debt shock, came with warnings or a background narrative. In many respects, you could see the clouds gathering – or at least see them forming on the horizon. But Covid struck with an abruptness that upended not only markets but also our way of working and living. It showed how, overnight, the unthinkable becomes reality.

Of course, there were other major market moments – from the spread between Italian and German bonds in the euro crisis, to watching spreads in the lead-up to Lehman’s fall – when you felt the stress points. But Covid was a different beast: within days the global macro environment completely transformed. Markets realised thousands of companies might have no revenue, policymakers scrambled, and work shifted, literally overnight, to remote settings. The shock to risk, liquidity, and our frameworks was profound.

How do you convey to less experienced investors the magnitude of the Covid shock – particularly those who joined post-Covid and have only know the investment landscape since?

FC: Experience is the best teacher, but study matters too. Many younger fixed income managers started when negative rates were the status quo. Few expected yields to spike as they did in 2022 to 2023. Covid was a lesson in humility: always prepare for the unimaginable. The pandemic, and the policy response – lockdown, massive stimulus, and then inflation – were outside most investors’ lived experience. We have to teach that unpredictable ‘tail risks’ aren’t just theory.

Some would say that Covid was a ‘black swan’ event. Would you agree that it altered your perception of risk and challenged the limits of your models?

FC: Absolutely. We had longstanding risk limits – volatility caps, diversification, scenario planning – but Covid blew through volatility measures in days. Correlations among assets changed without warning; things previously unlinked suddenly moved together. Volatility itself multiplied tenfold. I’d never imagined some fixed income instruments could swing that fast. Our approach had to evolve: we shifted from purely volatility-based to a suite of limits – on duration, exposures, and liquidity – so we could adapt if correlations again went haywire.

Can you recall where you were when you realised the scale of Covid’s impact for fixed income professionals?

FC: With 9/11, there was that one searing TV moment where the planes were hitting the twin towers. Covid was different, it was a series of shocks. The Italian city lockdowns – a weekend event – were my first hint. Markets reacted instantly, but within a week, most of Europe followed.

The reality was that we had to transition an entire office of staff to working-from-home setups virtually overnight. Thankfully, IT support at DNCA made that happen efficiently. But the disruptions didn’t stop there because, on a personal note, my second child had just been born weeks before. Luckily my neighbours left Paris just before the restrictions came into effect, so they lent me their keys and I could set up my office in their apartment. But clearly, there was a real sense of upheaval both at home and at work.

How did you continue to function as a firm and as a bond investor?

FC: It was just a rush to get liquidity. Bond markets seized up overnight. So, to find liquidity, we sometimes had to be awake at 2am to sell into Asian central banks, or to wait for the Fed. These opportunities could be once or twice a week, not daily.

While we weren’t literally working 24/7, our team had to monitor multiple global windows, which underscored just how fragile funding and trading arrangements can become. Central bank actions returned to normal within a month, but it was a stark reminder of the market’s dependence on policymakers.

When the second Covid-related lockdown rolled around, were you better prepared?

FC: Much better. Our full suite of new risk limits and remote infrastructure was in place. Flexibility increased; people didn’t need to rush back to the office. The big lesson was that no risk model is truly ‘finished’. Preparedness – whether for pandemics, cyber events, or market shocks – is now at the core of our risk culture.

What are the most important lessons investors should take from Covid?

FC: In the short term, always be prepared for ‘the impossible’. Before Covid, I would have repeatedly said that my funds’ volatility could never breach their caps. But after the pandemic, it’s clear that they could –  a case of the real world reminding me that it’s important to be able to adapt, and that what once seemed certain can end up being naive. We now expect the range of possible outcomes to be much wider. Liquidity planning, multiple risk metrics, and readiness to pivot have become standard. And above all, remain humble: the next big shock will always be something the market hasn’t modelled.

Over the longer term, it’s important to realise that every economic bust or market crash invites a massive policy response. After the GFC and eurozone crisis, inflation never materialised. But after Covid, it did. So, in many respects, this time really was different. The scale of fiscal and monetary intervention was unprecedented, and it finally triggered inflation. And for bond investors, inflation is a disease worse than Covid.

It’s crucial to recognise that in democracies, politics drives spending. Populism, fiscal expansions, and ‘gifts for all’ eventually sow the seeds for higher inflation – and possibly currency volatility. Next time, the US or another anchor market could see its own debt or currency in the crosshairs.

When you look at the eurozone today, and particularly France, do you see any risk of a sovereign debt crisis?

FC: Compared to the sovereign crisis in 2011, many eurozone countries – Italy, Spain, Portugal, Greece – are much improved and have built resilience. Today, France stands out as vulnerable: particularly because it, and other eurozone countries, don’t issue their own currency.

And that’s fundamentally different to the US, which can print dollars in an emergency and is unlikely to default – even if a big devaluation is always possible. In the eurozone, a default is conceivable, especially if political will or unity breaks down. Investors must be open to that ‘unthinkable’ possibility – though it could also be an opportunity, depending on how risks are priced.

What should investors that have only ever known 2% inflation know about a world that’s likely have stubbornly higher inflation?

FC: It’s important to remember that disinflation was the outlier, not the norm. For decades, aggressive central banks, global competition, and China’s rise anchored prices. Many investors, me included, only became professionally active during years of falling or flat inflation. But the impulse of politicians in democracies is to spend – and eventually, that means inflation returns. Investors who assume it can’t happen overlook both history and human nature.

A country like France – or others running large deficits – can easily drift toward the Argentina scenario if policy isn’t prudent. That’s not overnight hyperinflation, but a gradual decline in purchasing power as government indulges in fiscal expansion and money creation. Eventually, higher prices and wage pressures spur a cycle that’s very hard to contain.

What indicators do you monitor to assess whether inflation might spiral?

FC: Exchange rates tell the truest story. Look at Argentina’s currency: when I first went there in the early 2000s, it was three pesos to the euro; now it’s over 1,800. While that’s an extreme, developed markets aren’t immune. If a government spends unsustainably, the exchange rate will eventually catch up. Developed countries living beyond their means will see some combination of higher taxes, inflation, or both. The warning signs include persistent deficits, complacency about printing or borrowing, and a belief that ‘this time it’s different’.

Often, there needs to be change in mindset – policymakers must resist simply buying popularity. Societies must remember that sustainable prosperity requires work and prudent management. If not, we’ll see a gradual realignment, with emerging markets gaining a bigger share of global wealth while indebted nations shrink in relative terms.

Looking ahead, the world seems as fragile and unpredictable as ever. How can investors prepare for an uncertain future?

FC: Stay humble and be ready for the unexpected. Overconfidence and complacency are the investor’s greatest enemies – every cycle brings new risks, but also opportunities for those who are prepared. Examine history, respect risk, and keep challenging your own assumptions. It’s the only way to thrive through crises, not just survive.

Interviewed in November 2025