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Text on screen: Mike Cudzil, Portfolio Manager, Fixed Income
Text on screen: Four Reasons for the Recent Rise in Global Bond Yields
Cudzil: Despite inflation trending lower and the Federal Reserve nearing the end of their hiking cycle, global yields have risen over the past couple of months. We think there are four main reasons for the recent rise.
Text on screen: Resilient US GDP data, US downgraded by Fitch, US Treasury forward issuance, Bank of Japan adjusted yield curve target
First, resilient data in the United States. GDP has been running above potential for the past couple of quarters and appears to be running above potential for the third quarter as well. Second, Fitch downgraded the United States from triple-A status, the second rating agency to do so in the last 12 years.
Images on screen: Stock market ticker
Third, the U.S. Treasury needs to issue an additional $350 billion worth of Treasuries this year, an additional $750 billion worth of securities for the next few years. This should increase coupons for several quarters. And finally, the BOJ recently adjusted their yield curve target from 50 to 100 basis points, moderately impacting the higher yields globally.
Given the recent rise in yields, we're finding fixed income more attractive, both on a nominal and real basis. Nominal yields in the United States haven't been here since the global financial crisis, and real yields are north of 2% across the curve.
On top of that, while real yields have become cheaper, equities and other risky assets have become more expensive. As a result, we're adding duration across complexes, some complexes overweight depending on starting conditions and other risks. And we'll continue to add into higher yields.
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Please note that this video following contains the opinions of the manager as of the date recorded, and may not have been updated to reflect real time market developments. All opinions are subject to change without notice.
All investments contain risk and may lose value. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and low interest rate environments increase this risk. Reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Equities may decline in value due to both real and perceived general market, economic and industry conditions.
The credit quality of a particular security or group of securities does not ensure the stability or safety of an overall portfolio. The quality ratings of individual issues/issuers are provided to indicate the credit-worthiness of such issues/issuer and generally range from AAA, Aaa, or AAA (highest) to D, C, or D (lowest) for S&P, Moody’s, and Fitch respectively.
The terms “cheap” and “rich” as used herein generally refer to a security or asset class that is deemed to be substantially under- or overpriced compared to both its historical average as well as to the investment manager’s future expectations. There is no guarantee of future results or that a security’s valuation will ensure a profit or protect against a loss.
Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions or are appropriate for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Outlook and strategies are subject to change without notice.
Bank of Japan (BoJ)
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