Real yields have recently trended higher, albeit from low levels. For investors, the driver behind the rise is important. If higher real yields reflect an improved growth outlook (due to additional US fiscal stimulus and encouraging vaccine progress), the impact on risk assets such as corporate credit and emerging market debt will likely be limited. If, however, the shift in real yields is driven by expectations for less accommodative monetary policy, the environment could turn less supportive for risk assets. Do we think global rates will trend higher this year? Yes; given prospects for further sizeable US fiscal stimulus and vaccine-driven growth improvements1. Do we think central banks will take their foot off the ‘accommodative policy’ pedal? No; we think central banks will remain on easy policy auto-pilot through 2021 and beyond because the underlying inflation reality is set to remain subdued (due to labor market slack) and given a more tolerant approach to higher inflation outcomes (informed by prior inflation shortfalls and an increased focus on economic inequalities by policymakers)2. As a result, our compass for navigating the ‘status low’, as discussed here, is unchanged. If anything, recent rate market volatility strengthens our resolve in the need for balanced exposure to risk assets, and we remain focused on seeking to ensure our clients' fixed income portfolios are resilient to tail risks such as rate market volatility and policy speculation3.
1 The economic and market forecasts presented herein are for informational purposes as of the date of this presentation. There can be no assurance that the forecasts will be achieved. Please see additional disclosures at the end of this presentation.
3 The portfolio risk management process includes an effort to monitor and manage risk, but does not imply low risk.
4 Source: Macrobond. Data releases as of January 2021. US Labor Force Participation Rate for Women & Men aged 16 Years & Over.
5 See “Getting Back to a Strong Labor Market” (Chair Jerome H. Powell, February 10, 2021).
6 See remarks by current US Treasury Secretary, then Fed Chair Janet Yellen: “What’s (not) up with inflation?”.
7 In 2017, the presence of online retailers subtracted an estimated 0.25% from US core goods inflation and 0.1% from core personal consumption expenditures (PCE) inflation, the Fed’s preferred measure. Source: Goldman Sachs Global Investment Research, The Amazon Effect in Perspective (September 30, 2017).
9 For example, see “Full Employment in the New Monetary Policy Framework” (Governor Lael Brainard, January 13, 2021) and “Getting Back to a Strong Labor Market” (Chair Jerome H. Powell, February 10, 2021).
10 See ECB Listens – Summary report. Many respondents also believe the ECB could contribute to a shift towards a greener economy through a variety of measures including facilitating green investment, supporting the fiscal policies needed for the transition through reducing investment in polluting activities, taking climate criteria into account in the ECB’s refinancing operations, integrating climate-related risks in models and steering banks’ behavior to fund environmentally friendly companies.