There is no doubt that high inflation is a serious problem. It weakens real consumer spending, production and employment. But more insidious, the uncertainty and volatility it generates can weaken long-term investment and “feed on itself” with greater wage and business costs, slowing trend economic growth. “Pro-cyclical” Fed tightening argues for higher US fixed income allocations and cautious equity positioning. CIO continues to believe broader financial markets cannot find stability until interest rate markets define a range.
The global economy has endured a series of severe, unusual, and unexpected shocks over the past three years. The most obvious result of these shocks is inflation. Across developed economies, consumer prices have been rising faster than they have in decades.
Early 2022 was a lousy time to be a fixed income investor, but after a collapse in bond valuations and amid a period of slower global growth, Citi’s CIO (Chief Investment Office) now believes current rates of US government bonds look attractive.
Over the past week, particularly after Chairman Powell’s late-Wednesday message, investors retreated from riskier assets, fearful that the Fed will be forced to tame inflation via a recession. For equity investors, much uncertainty remains as to where long-term bond yields may stabilize and what economic growth will look like after higher interest rates have impacted consumers and businesses.
Shifting 2% of medium-risk global portfolios into long-duration US Treasuries
By Citi Wealth Insights |
As CIO began to reduce its overweight to “risk assets” from a peak of 11% nearly a year ago -unwinding the comparable underweight to fixed income – the team has gradually added a sizeable investment in intermediate US Treasuries and Investment Grade Corporate Bonds. In February, CIO advised that the significant overweight could be shifted to longer-duration bonds when yields rose further. In Citi’s view, that time is now.
When bond yields were abysmally low, the value of bonds in portfolios was also low. Rates of 2.5%-3.0% on US government bonds in a period of slower global growth are starting to look far more interesting. And one can imagine rates going lower at some point in 2023.
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