CONTRIBUTORS
Paul Mielczarski
Head of Global Macro Strategy & Portfolio Manager
Preview
Easing into a compelling outlook for bonds
After a strong finish to 2023, the US bond market resumed its sell-off in the first quarter on the back of hot January and February inflation prints and continued US growth resilience. Is the first quarter sell-off a temporary setback for fixed income investors or an ominous sign pointing to another year of bond market underperformance? We believe that after the recent sell-off, the risk-reward trade-off for bonds is now quite compelling. Ultimately, we believe the last two inflation prints were only temporary setbacks, and the broader disinflation process remains on track. Meanwhile, consensus growth expectations have been revised sharply higher and going forward, it will be more difficult for the US economy to outperform expectations. Finally, valuations and positioning in both equity and credit markets are quite stretched, and bonds could benefit from a potential correction in risky assets.
This quarter’s Macroeconomic update also covers:
- Watching inflation data
- Growth is resilient but not inflationary
- The potential for yield curve normalization
- UK bonds
- Strategy implications
Definition:
Disinflation is a temporary slowing of the pace of price inflation and is used to describe instances when the inflation rate has reduced marginally over the short term.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal. Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges. Past performance is no guarantee of future results.
Equity securities are subject to price fluctuation and possible loss of principal.
Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls.
International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.
Commodities and currencies contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors.
US Treasuries are direct debt obligations issued and backed by the “full faith and credit” of the US government. The US government guarantees the principal and interest payments on US Treasuries when the securities are held to maturity. Unlike US Treasuries, debt securities issued by the federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the US government. Even when the US government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the market value of these securities.