What If Inflation Is Not Slayed? – April 1, 2024

A recently published report updated our fixed-income recommendations and strategies. In contrast with the prevailing consensus, we believe that the risk for developed market (DM) bond yields is still skewed to the upside over the next year. In fact, additional monetary tightening may well be needed to truly return DM, and especially U.S., inflation to low and stable levels.

Despite the highest inflation rates in 40 years, bond investors remain sanguine about the threat of sticky inflation and are not demanding compensation for this risk. There is still an entrenched belief in secular stagnation, especially among the major central banks.

The Fed is intent on lowering policy rates beyond the near run, even though by its own admission such a move lacks justification, based on the latest FOMC dot plot. Meanwhile, the BoJ finally took a first step by hiking rates, which has started to lift the last major anchor for global bond yields. Economic developments in Japan provide a warning for those still betting on sluggish economic growth and persistently low inflation elsewhere.

We remain below benchmark duration and underweight government bonds, while overweight corporate bonds and EM local-currency debt, within a global (currency hedged) fixed-income portfolio.


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