A just-published report updated our fixed-income recommendations and investment strategy. The main conclusion was that the strength of the global economic expansion and dearth of economic slack would prevent DM inflation from returning to the 2% inflation world of the 2010s. Thus, we remain cyclically bearish on bonds within a multi-asset portfolio.
Central banks and many bond investors are still holding to the view that this decade’s rise in inflation will fully reverse. Both have consistently underestimated the resilience of global growth, and thus the level of policy rates needed to create restrictive monetary conditions. More recently, the consensus view has shifted from expecting a recession to a soft landing, and a further capitulation ahead from a soft landing to no landing is probable. We anticipate that underlying DM inflation will bottom out above expectations over the next six months or so.
The implication is that bond yields will eventually rise to new highs for the cycle, once investors realize that the Fed et al will not be cutting rates in 2024. We remain short duration and are positioned for a mild re-steepening of the yield curve. Within global fixed-income portfolios, we are underweight government bonds (especially the U.S. and euro area), while overweight corporate bonds and EM local-currency debt.