Can the U.S. equity rally hold if the Federal Reserve hikes?
Shechar Dworski, PhD, CFA – Head of Economics and Director, Macro Strategy
Could the 2020s be the worst decade ever for fixed income?
Neil Simons, Portfolio Manager, Head of Multi-Strategy
Most investors know bonds can struggle during inflationary periods. Few appreciate just how different this time really is.
History shows that bad decades for bonds are not unusual. U.S. Treasuries delivered negative real returns in four consecutive decades from the 1940s through the 1970s. But here's the twist: even in those terrible periods, bonds still made money in nominal terms. Investors were losing to inflation, but they were still seeing positive account statements.
The 2020s are different. Long-duration U.S. Treasuries have lost roughly 23% in nominal terms since January 2020, before adjusting for inflation. That has essentially never happened over a full decade.
On a real basis, long-duration Treasuries are down over 40% from their January 2020 starting point. The worst prior decade (the 1940s) saw annualised real losses of about 2.6% per year. The 2020s are already running at roughly double that pace.
Yields started near zero, so there was no coupon buffer against rising rates. In the 1940s through 1970s, bonds at least paid some income that partially offset inflation. In 2020, investors had neither yield nor duration protection.
With 10-year Treasury yields now back above 4.5%, bonds can earn real returns again if inflation cooperates. But the structural drivers of this inflation cycle such as fiscal expansion, energy supply constraints and deglobalization, suggest it may not. In our view, investors who considered 2022 to be a one-time event should carefully consider whether traditional 60/40 portfolio assumptions remain appropriate in light of evolving credit markets.
Every prior extended period of bond underperformance coincided with commodity outperformance, currency debasement, and rising hard asset prices. The 2020s are following that script.
Shechar Dworski, PhD, CFA – Head of Economics and Director, Macro Strategy
Jeff Bradacs, CFA, Co-Head Equity Strategies, Head of Portfolio Management & Trading
Neil Simons, Portfolio Manager, Head of Multi-Strategy
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All data sourced from Picton Mahoney Asset Management Research unless otherwise cited.
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