January 24, 2023
Luis D. Alvarado, Investment Strategy Analyst
Softening inflation may extend long-term bond rally
Long-term fixed income has recovered over the past two months as yields have declined
U.S. Treasury yields have been trending lower in the first two weeks of the year, influenced largely by the macroeconomic outlook. We believe it should be difficult for the 10-year U.S. Treasury yield to cross above 4% in the near term, especially as inflation has also continued to trend lower and the markets expect the Federal Reserve to pause interest rate hikes in a few months.
On October 26, 2022, we upgraded our guidance on long-term fixed income to most favorable. We guided investors to increase duration exposure (a measure of interest-rate sensitivity) in their portfolios, while also maintaining exposure in short-term fixed income — effectively implementing a barbell strategy. Since then, yields have declined significantly, allowing long-term fixed income (purple line) to experience a strong recovery.
What it may mean for investors
- For the first half of 2023, we expect the 10-year Treasury yield to remain range bound between 3.4% and 3.9%, but our bias is to the downside.
- We believe that current yield levels still have the potential to provide opportunities, as we expect lower yields 12 to 18 months from the time of this writing.
Forecasts and targets are based on certain assumptions and on views of market and economic conditions which are subject to change.
Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Bonds are subject to market, interest rate, price, credit/default, liquidity, inflation and other risks. Prices tend to be inversely affected by changes in interest rates. Although Treasuries are considered free from credit risk they are subject to other types of risks. These risks include interest rate risk, which may cause the underlying value of the bond to fluctuate.
Bloomberg U.S. Aggregate 10+ Year Bond Index is composed of the Bloomberg U.S. Government/Credit Index and the Bloomberg U.S. Mortgage-Backed Securities Index, and includes Treasury issues, agency issues, corporate bond issues, and mortgage-backed securities with maturities of 10 years or more.
Bloomberg U.S. Aggregate 1-3 Year Bond Index is composed of the Bloomberg U.S. Government/Credit Index and the Bloomberg U.S. Mortgage-Backed Securities Index, and includes Treasury issues, agency issues, corporate bond issues, and mortgage-backed securities with maturities of 1-3 years.
Bloomberg U.S. Aggregate 5-7 Year Bond Index is composed of the Bloomberg U.S. Government/Credit Index and the Bloomberg U.S. Mortgage-Backed Securities Index, and includes Treasury issues, agency issues, corporate bond issues, and mortgage-backed securities with maturities of 5-7 years.
An index is unmanaged and not available for direct investment.
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