Rates across the globe have risen to their highest levels in decades after resilient growth and inflation prompted a widescale transition from the prior low interest rate environment. The change is now being reflected in policy moves – as seen in the FOMC's first hike in three years – and financial assets face a less familiar regime where what worked for investors previously may be less viable in the environment ahead.
The yields on 10-year US Treasuries are indicative of this new regime and the potential forward policy path. The FOMC's updated Summary of Economic Projections shows the corresponding hawkish shift among members, and their dot plot reflects the majority of the committee's expectation for a new but shallow hiking cycle that has been priced into markets.
While one-dimensional measures like yields fail to capture many important factors impacting asset prices, the math behind them is a key component when considering risk and reward. At the core of this, the US Treasury curve now features a potential payoff asymmetry that is in many respects inverse to its low rate environment condition. In a straightforward way, these bonds can once again offer relatively attractive income through periods of continued economic expansion, and their potential for downside protection in the event of unexpected issues (which have widened around AI) has been restored through higher rates to increase what they can provide for a portfolio.
With this backdrop, harvesting the highest yields in decades while maintaining a core balance to what can happen next to growth and inflation can increasingly make sense for investors as markets adjust to a new trajectory for policy, technology, and the economy.
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