Authored by: TJ Scavone

Inflation Pressures Central Banks to Begin Normalizing Policies

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This week, the Federal Reserve, the Bank of England, and to a lesser extent the European Central Bank all acted to tighten monetary policies. These tightenings came as inflationary pressures have surged in many countries and as other central banks have looked to rein in simulative policies. But, when combined with above-trend growth expectations next year and central banks’ likely cautious tightening approach, we suspect financial conditions will likely remain accommodative and supportive of risk assets.

Government Bond Yields Are Likely to Rise as Central Banks Remove Support

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Long-dated government bond yields rose in 2021 on strong economic growth and surging inflation. Central banks have maintained their easy money policies despite the rapid recovery in economic conditions, likely keeping yields lower than they would have been otherwise. This may soon change now that several major central banks are starting the process of dialing back support.

Will Talk of the Fed Tapering Cause Another Bond Tantrum?

No. While the Federal Reserve’s discussion of tapering asset purchases signals a shift toward tighter monetary policy, both the Fed and markets learned valuable lessons from the 2013 Taper Tantrum; the impact on bond yields should be limited.

Playing Defense in a Low-Rate Environment

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Investors have predominantly relied on developed markets sovereign bonds for defense in balanced portfolios, but low rates have diminished their diversification characteristics. We find that a diversified basket of “defensive” assets has provided comparable diversification characteristics to developed markets sovereign bonds historically. While this basket may not solve all challenges associated with today’s low-rate environment, we view it as better equipped than developed markets sovereign bonds to defend balanced portfolios during future periods of equity market stress.

Outlook 2021: A Year of Healing

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As 2020 comes to a close, we expect some key investment drivers to persist into next year. While our views speak to many different challenges confronting investors, including the poor bond yields on offer, the fate of US-China relations, and where to find growth, they are rooted in the belief that 2021 will be a year of healing for the global economy.

Room to Run for Muni Bonds

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Despite the recent volatility, in our view, munis continue to be an attractive alternative to both Treasuries and high-quality corporates for long-term taxable investors. Even tax-exempt investors that typically don’t hold munis may want to consider them in the current environment given relative valuations and credit fundamentals.

Life After Zero: Reassessing the Role of Sovereign Bonds with Negative Nominal Yields

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In recent weeks, as the COVID-19 pandemic spreads across the globe, nominal high-quality sovereign bond yields throughout developed markets have plummeted toward zero, increasing the likelihood that most developed markets may soon need to contend with negative yields, and leading investors to question whether high-quality sovereign bonds are still the best form of insurance. In light of these developments, we examine the historical safe-haven characteristics of high-quality sovereign bonds and assesses whether they remain a viable safe-haven asset when nominal yields are negative.