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Asset Allocation

Asset Allocation Update

Yield curve positioning after peak inflation

Although Treasury yields have dropped back in recent weeks amid signs that inflation has peaked, we don’t think it makes sense to extend duration. Of course, the longer a bond’s remaining life, the greater the sensitivity of its price to a change in its yield. So, those with distant maturities would tend to deliver better returns if yields fell further alongside inflation, even if the curve bull steepened a bit. But we suspect there will be a considerable lag between peaks in inflation and yields, as there was in the early 1980s.

24 May 2022

DM Markets Chart Book

Markets are creaking but not (yet) breaking

So far, the sell-off across bond and equity markets this year has not triggered major signs of systemic risk. If that were to change, central banks would probably have to step in to prevent a destabilising cycle of panic selling and money market distress from taking hold, even if such as step would to some extent clash with their plans to tighten monetary policy further. This publication takes stock of the various signs of stress across the global financial system. We intend to update the analysis periodically while the current market turmoil continues. In view of the wider interest, we are making this Stress Monitor available to clients of our Global Markets, FX Markets, and Asset Allocation Services.

20 May 2022

Asset Allocation Update

On the relative prospects for US equity REITs

We expect US equity REITs to remain under pressure between now and the middle of next year, given our view of the US stock and bond markets. Nonetheless, we doubt they will underperform US equities substantially given their relative valuations – we see no clear evidence that they are in more of a bubble; the overall outlook for the property markets in which they invest; and their apparently solid fundamentals.

17 May 2022

Our view

We think the rises in global government bond yields and falls in equity prices have a bit further to run. Government bond yields have typically peaked only shortly before the ends of central bank tightening cycles and we expect most major central banks to continue hiking rates over the next 12 months or so. We think the increase in government bond yields, as well as the threat of slowing global economic growth, will keep risky assets, such as equities and corporate bonds, under pressure. We also expect the worsening risk environment as well as particularly aggressive tightening by the Fed to result in a further strengthening of the US dollar. We suspect markets will only start to turn a corner around the middle of next year as tightening cycles draw to a close.

Latest Outlook

Asset Allocation Outlook

Asset allocation after inflation has peaked

Although we suspect that inflation in the US has now peaked, we don’t think that this will prevent either long-dated Treasury yields from rising again or the stock market there from coming under renewed pressure until the middle of next year. Indeed, we expect most “safe” and “risky” assets to fare poorly between now and then. This reflects a view that their fortunes won’t turn around decisively until shortly before the Fed stops tightening policy in summer 2023, even if the central bank engineers a “soft landing” for the economy in the meantime. Markets Drop-In (11th May, 10:00 EDT/15:00 BST): We’re discussing our Q2 Outlook reports and what they say about the potential performance of bonds, equities and FX rates as inflation peaks in a special 20-minute briefing on Wednesday. Register now.

10 May 2022