MacroResearchBoard

U.S. Treasurys: Poor Value Even With A Dovish Fed – October 18, 2021

A just-published report reiterated our bearish cyclical view on bonds. Central banks continue to lean hard against the mounting pressure to shift from their current hyper-accommodative, pro-inflation policy stance. The global economic expansion is moderating in growth terms, but the outlook is for continued above-trend growth in the major developed economies in 2022. Moreover, our expectation that the rise in core inflation would prove to be stickier than the consensus “transitory” view is starting to leak into the bond market and even some individual central bankers are shifting their views.

Treasury yields are well below the implied fair value based on even a relatively dovish FOMC projection for the fed funds rate. If our upbeat economic view pans out, Treasury yields would move significantly higher and the Fed will eventually be forced to revise its projections higher and rethink its estimate of the longer-run equilibrium rate. Directionally, similar views hold for the other major economies.

We remain maximum underweight bonds and duration within global fixed-income and multi-asset portfolios. Bond yields are likely to move higher in waves in the coming years, with the second wave beginning to take hold this month. We are also betting on a further curve steepening and favor inflation protection, corporate debt and EM sovereign credit, with a preference for EM local-currency over U.S. dollar-denominated debt, within global fixed-income portfolios.