CONTRIBUTORS
Francis A. Scotland
Director of Global Macro Research
Preview
Investors embrace disinflationary soft landing
In the last three months of 2023, we witnessed a remarkable market pivot. The US 10-year Treasury yield surged to 5% in late October before plunging below 4% at the end of the year. In the space of two months, the market narrative has swung from expectation of further Federal Reserve (Fed) rate hikes and concerns about rising bond issuance to fully embracing a disinflationary soft-landing view.
At the start of the fourth quarter, our fixed income portfolios were bullish on duration and benefited substantially from the sharp decline in bond yields. With inflation falling sharply and major developed market central banks about to embark on rate-cutting cycles, the macroeconomic environment is generally favorable for bonds. But the key question for us is: How much further can bond yields fall without a major growth scare or a recession?
The bottom line is that we are likely to go through a period of bond market consolidation with potential backups higher in yields. The more interesting opportunities for generating alpha could come from relative curve and cross-country positions instead of large directional bets on the US 10-year yield.
In previous macroeconomic updates, we have frequently emphasized that the major macro developments over the past two years have reflected post-pandemic normalization dynamics rather than typical business cycle events. This normalization process is now well advanced with the US economy settling back toward an equilibrium of around 2% real gross domestic product (GDP) growth and 2% inflation.
Additional topics covered:
- Potential impact on Federal Reserve policy and treasury curve
- Macroeconomic drivers
- Global considerations
- Strategy implications
Read the full paper to learn more.
Definitions:
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.
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