“In light of the uncertainty on inflation and on policies of the new US administration, we think investors should maintain a flexible stance on US Treasuries and explore bonds in regions such as Europe.”
- A change in market expectations on US inflation and economic activity has driven the recent surge in bond yields.
- We believe the Fed will ease policy, but will get vigilant on incoming data that could affect its decisions.
- Bond yields are attractive from a historical perspective, but flexibility is key as uncertainty is high.
Bond yields started the year with strong upward moves, and reached close to the highs seen in April last year. This latest upward trend, which has been evident from September amid Trump’s election campaign and his eventual victory, has been partly driven by resilience in the US economy. More recently, data around labour markets and the services sector and potential policies of the new administration have flamed concerns that disinflation in the US will be affected. This, along with worries of excess Treasuries supply, pushed bond yields higher. The trend was also evident in UK bond yields. Looking ahead, any strength in US labour markets and upside surprise to inflation could cause the Fed to alter its course on policy and cut rates by less than previously expected. We think the overall inflation path will likely remain downwards, but there are some risks.
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