A just-published report updated our absolute return recommendations. We remain generally constructive, but anticipate increased financial market volatility, particularly in the frothier segments of the market. Hyper-accommodative monetary conditions will gradually unwind and global financial asset markets will become more sensitive to risk factors that inevitably will emerge.
Although the global economic backdrop is the brightest in decades, risk asset markets have already discounted a lot of good news and are ill-prepared for a durable bear market in bonds. Bond yields remain well below our measures of fair value. The rise in yields should occur gradually and in waves. However, central banks are falling further behind the inflation curve, raising the possibility of a disorderly rise in bond yields. Stay tuned.