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Is the multi-year bull-run in government bonds really over? It would certainly seem so. Global yields, led by U.S. front-end rates, have been on a modest upward trend since late 2016. How much further they increase as we move through 2019 could depend on the infl tion outlook, which in turn will likely take its cue from the outlook for wage growth.
Here, though, momentous forces are at play. Over the past two decades, the twin tides of globalisation and technological innovation have worked to undermine the bargaining power of labor. The result? A breakdown in the established relationship between unemployment levels and wages as defined by the Phillips Curve and, as a consequence, ever greater uncertainty about the future direction of inflation.
For investors this could present a problem. If wage growth does remain subdued, upward pressure on bond yields is likely to be modest. If, on the other hand, wages and infl tion expectations do rise, bond yields will likely spike. Where, then, could investors turn?
Given this background, one approach investors may want to think about is hedging inflation in an efficient way. The charts highlight the potential mispricing between 30-year breakeven rates and real yields on 30-year U.S. Treasury inflation-protected securities. If investors are concerned about inflation, then a combination of U.S. Treasury inflation-protected securities and U.S. breakeven strategies could be an option to consider.
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Bonds are subject to interest rate, credit, liquidity, call and market risks, to varying degrees. Generally, all other factors being equal, bond prices are inversely related to interest-rate changes and rate increases can cause price declines. Commodities contain heightened risk including market, political, regulatory, and natural conditions, and may not be suitable for all investors. Currencies are can decline in value relative to a local currency, or, in the case of hedged positions, the local currency will decline relative to the currency being hedged. These risks may increase fund volatility. Equities are subject to market, market sector, market liquidity, issuer, and investment style risks to varying degrees. There is no guarantee that dividend-paying companies will continue to pay, or increase, their dividend. Investing in foreign denominated and/or domiciled securities involves special risks, including changes in currency exchange rates, political, economic, and social instability, limited company information, differing auditing and legal standards, and less market liquidity. These risks generally are greater with emerging market countries. Certain investments involve greater or unique risks that should be considered along with the objectives, fees, and expenses before investing. High yield bonds involve increased credit and liquidity risk than higher rated bonds and are considered speculative in terms of the issuer’s ability to pay interest and repay principal on a timely basis.
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