SUMMARY
Good economic news lately has driven long-term US Treasury yields higher. We explain why this may lead to rate cuts next year and highlight global portfolio opportunities we see here and now, say David Bailin and Steven Wieting.
- Long-term Treasury yields moved unexpectedly higher following the last Federal Open Market Committee (FOMC) meeting. Positive US economic news combined with “a rates trifecta” of higher international bond yields in Japan, new Treasury supply, and the Fitch US downgrade all contributed to yields increasing.
- Paradoxically, higher long-term yields will likely accelerate the decline of inflation. If so, the Federal reserve will be more likely to cut rates in 2024. To avoid reinvestment risk and a decline in short term yields, we would suggest that clients establish or maintain a portfolio weighted toward intermediate bonds.
- Over the past 2 months, the equity rally has begun to broaden beyond mega-cap technology stocks. We expect this trend to continue as earnings bottom and start to recover into 2024. We therefore see opportunity to be more selective within US large caps while building positions in US SMID and non-US stocks where valuations are more reasonable.
