- Nov. 29, 2022
-- vestment portfolios have faced turbulent headwinds this year. Elevated and persistent inflation has driven many central banks to move into restrictive monetary-policy territory to soften demand. Stock and bond markets retreated as investors adjusted to higher interest-rate expectations over the course of the year. Bonds typically act as a volatility dampener in portfolios and move in the opposite direction to stocks, providing a buffer against stock-market losses. Quickly rising interest rates and demand concerns meant that bonds entered into a bear market at around the same time as stocks and provided little protection to stock-market declines.
Inflation — and the Federal Reserve's ongoing response to bring it down — will likely continue to drive markets in the coming months. While the jury may still be out on exactly how far the Fed will need to go to constrain inflation, we believe we're closer to the end of the tightening cycle than the beginning. We expect inflation to trend downward over the coming months, shifting the market environment and easing some pressure from investment portfolios. The rest of the journey may not be smooth, but we believe diversification can help level the path.Putting this year's bond pressures into perspective
We believe relief is on the way
- During the COVID-19 pandemic, amid significant economic growth concerns, the Federal Reserve cut its key policy rate to near zero to help stimulate the economy, increasing bond prices and driving yields lower. As consumer demand rebounded while supply chains remained challenged, inflation skyrocketed and proved more persistent than it previously expected.
- In 2022, the Federal Reserve decided to raise rates at a pace not seen since the '70s and '80s, aiming to reduce demand and slow the pace of inflation1. This rise in the short-term policy rate sent bond prices lower as investors priced in expectations for higher interest rates. As a result, bonds experienced the largest sell-off since records started in 1926, failing to provide their typical diversification benefits1.
As we approach the end of the Federal Reserve's tightening cycle and a potential peak in yields, we believe a lot of the bond-price adjustment is now behind us. History also tells us these peaks generally occur about two months ahead of the last Fed rate hike.
Source: 1. Bloomberg, past performance is not a guarantee of future returns. Diversification does not guarantee a profit or protect against loss in declining markets.
- We see attractive opportunities forming in fixed-income asset classes across bond maturities, as higher yields enhance return potential. With interest rates meaningfully higher now than at the start of 2022, we believe bonds are better positioned to provide diversification benefits.