Here is the report.
Page 20
— After-inflation US
Treasury yields of 2.5%
are currently higher than
80% of all periods in the
past 25 years.
The inversion of the US yield curve, even if less
pronounced than before, remains an indicator of
tight monetary policy. This can leave the economy
more vulnerable to a shock, as was the case when
the pandemic hit. Another supply shock that tips the
economy into a broader recession can never be ruled
out given geopolitical uncertainties. If a new, global
shock were to materialize, monetary easing could be
more profound than we expected, but it would be no
immediate substitute for economic growth
and profits.
Assuming no imminent recession or major global
supply shock, it seems likely that the Fed will ease
monetary policy gradually in the coming few years.
This should be consistent with 10-year US Treasury
yields falling back somewhat, perhaps to 3.75% by year-end 2024. Investors should also understand
that the long period of zero interest rates – and even
negative yielding bonds – will go down in history as
an outlier. We see this much like the mirror opposite
period of “great monetary neglect,” which boosted
inflation and yields throughout the 1970s.
Investment strategy:
both income and growth
opportunities have been restored
The two pillars of investment returns – income and
growth – have been reinvigorated. Yields in the US
have risen toward two-decade highs ( FIGURE 10 ).
With investment grade US corporate bond yields
averaging 6% and inflation decelerating, it is quite
possible to earn real returns of 4% across a diversified
range of fixed income (please see Core portfolios
could be ready to shine on page 34).
At the same time, tight monetary policy has
driven both bond and equity investors to focus
predominantly on the largest and safest perceived
corporate balance sheets. This has left numerous
growth opportunities behind. The seven largest US
technology-related shares have driven most of the
return in global equities in 2023. We believe this is
unlikely to be the case in 2024 and 2025.
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