A just-published report examined a number of topical investment issues in view of recent heightened financial market volatility, including the ongoing peculiar behavior in the U.S. and some global yield curves. The short end of the U.S. yield curve has witnessed a notable rebound: yields hit new cycle highs last week, reflecting the strong economic recovery and surge in inflation. The long end, however, has acted as if nothing important has occurred at the macro level, with yields not much higher than earlier this year.
Our research has shown that the trend in short-term yields and rate expectations has tended to lead the long end of the yield curve in the run-up and early stages of rate-hiking cycles. Thus, in view of our above-consensus economic and inflation forecast for next year, we are maintaining a maximum underweight on bonds within a multi-asset portfolio and below-benchmark duration, in anticipated of long-term bond yields moving significantly higher in 2022.