Those who position themselves first benefit in the face of inflation! Global bond funds snap up Australian and German government bonds, with the Federal Reserve and the Bank of England listed as "laggards."

Countries that acted swiftly to combat this year's inflation surge are winning over bond investors, while laggards may ultimately pay the price through higher interest rates. Money managers including Jupiter Asset Management and Candriam are buying Australian government bonds, betting that four rate hikes since February mean the cycle is nearing its end. UBS Asset Management and France's Carmignac Gestion SA are accumulating German government bonds, expecting yields to decline as the European Central Bank acts more proactively and is better positioned than the Federal Reserve and Bank of England to suppress inflationary pressures. The logic: central banks that move earlier will see results sooner, limiting how much further they need to tighten. Unlike the previous inflation shock in 2021 and 2022when they initially held steady before tightening policy in unisonthis year's actions have been staggered. This creates opportunities for investors to bet on divergent paths. "Everything this year revolves around inflation and central bank credibility," said Mark Nash, fixed-income fund manager at Jupiter Asset Management. "Those who get it right will benefit." Monetary policy transmission involves lags, so the ECB's tightening has not yet fully permeated the real economy, which explains why European inflation remains elevated. Reserve Bank of Australia Governor Michele Bullock raised this point on Tuesday, noting that rate hikes may take 12 to 18 months to fully take effect. The ECB's stance is the key reason Carmignac is buying five-year German bondsit prefers German debt over other developed-nation bonds. In recent months, the German yield curve has flattened more than other countries, exceeding the flattening seen among other Group of Ten (G-10) members, signaling expectations of cooling inflation ahead. "I differentiate between central banksthe ECB on one side, the Fed and Bank of Japan on the other," said Guillaume Rigeade, co-head of fixed income at the French asset manager. "The ECB was very clear around March and April, saying, 'OK, this is an inflation shock.'" ECB President Christine Lagarde said this week that rising bond yields will slow growth and curb inflation from high energy costs more than previously forecast last monthwhen the bank implemented its second rate hike since June. Policymakers need to anticipate such second-round effects as early as possible, "because by the time it appears, it's already a bit too late." Kevin Zhao at UBS Asset Management has been buying 30-year German bonds and Australian government bonds, on the view that central banks that started hiking earlier will need to tighten less in the future. Meanwhile, he is shorting US Treasuries, expecting AI-driven US economic stimulus to require more Fed rate hikes. "During a supply shock, a proactive central bank is beneficial for bond investing because it reduces the risk of inflation spiraling out of control," Zhao said. With this week's rate hike, the Reserve Bank of Australia became the first major central bank to raise rates above their pandemic-era peak. Australian government bonds rallied after Bullock said she hopes this year's four rate hikes will be sufficient to tame inflation. Nash at Jupiter Asset Management is overweight Australian government bonds across all his fixed-income funds and this week reduced curve-flattening positions in favor of two-year notesafter the RBA signaled it may be nearing the end of its tightening cycle. He has remained cautious about buying US Treasuries, believing the Fed will be "slow" in following Australia, Europe and others. Nevertheless, this month's bond selloff pushed two-year Treasury yields to their highest in more than two years, prompting him to buy, on the argument that the market is pricing in too many rate hikes for the coming months. Jamie Niven, senior fixed-income portfolio manager at Candriam, prefers Australian government bonds over New Zealand and US debt. He has also cut exposure to UK gilts, reasoning that the Bank of Englandwhich has yet to raise rateswill have to catch up.