5. How should investors position, or is it too early?
Risk-reward has already shifted towards longer duration assets. While cash investors may be feeling comfortable with 5.10% return on 0-3 month T-bills in 2023, long duration broad fixed income as characterised by the Bloomberg Global Aggregate USD hedged index delivered an even more attractive return of 7.15%. Even more important is the majority of that return came during the last quarter as various central banks paused and pivoted to signalling rate cuts. The exceptional returns over that period were driven by capital gains as bond yields fell. This underlies the fact that in addition to attractive yields last seen in over a decade, this entry point also provides an exceptional opportunity for capital gains if bond yields fall.
More recent economic data weakness has further affirmed the view that major central banks including the ECB and the Fed appear likely to begin cutting rates in 2024 and possibly as soon as June. This illustrates that at this stage of the cycle timing the market can be risky as volatility remains elevated, but the opportunity cost of not considering longer duration fixed income assets is high when the cycle turns.
For investors concerned about having missed the interest rate rally in Q4 2023, developments in the beginning of 2024 have given back some of the gains presenting a more attractive entry point for those considering adding duration. This provides investors a unique opportunity and a second chance to jump on board as the monetary policy cycle turns.
Despite T-Bills having the highest yield, 10 and 30-year US Treasuries have longer durations and therefore total returns would be higher if rates decline