Three Things That Have Surprised Me – And One Thing I Wouldn’t Change

Over the past 18 months, we’ve all learned a thing or two while adapting to quarantine life. I, for one, mastered using a headset designed for professional gamers on work calls, while also using time I had previously spent on the Metro-North figuring out how to grow vegetables in Connecticut.

In financial markets, investors have had to do some adapting as well. Equities are back to all-time highs, inflation is jumping higher, the political and regulatory climate is a source of uncertainty, and an unprecedented amount of liquidity in the system alongside huge global demand for high quality bonds has pushed yields to rock-bottom levels.

In a way, the last 18 months haven’t been entirely different from the last 10 years of managing diversified income portfolios. The market ebbs and flows, but ultimately drives higher over time. But there are a few things that have surprised me over the decade I’ve managed the Multi-Asset Income Fund that will likely shape how we think about finding attractive income and returns in the next decade.

First, back in 2011, I would have never thought the Fed’s zero interest rate policy would still be in place 10 years later. Furthermore, it’s pretty wild that we have record equity levels and strong global growth coming out of the pandemic, yet the 10-year Treasury yield sits about 40bps lower than the 1.97% level when we launched the fund. And even looking ahead to the 10-year forward curve today, the market’s predicting the 10-year yield will be at 2.3% in five years – certainly not what many investors thought a decade ago. We’ve run big deficits, more than doubled the market value of outstanding Treasury debt, and yet the market views the growth outlook as stubbornly fragile.

Market expectations for interest rates remain muted

Chart image

Source: Bloomberg as of November 8, 2021. 10-year, 5-year forward curve represents market expectations of the 10-year US Treasury yield looking forward 5 years.