The traditional 60/40 portfolio split should be flipped on its head, according to David Norris, head of U.S. Credit at TwentyFour Asset Management, a specialist in fixed income based in London and New York and an independent operating subsidiary of Vontobel.
The bond side of that reversal should be anchored in short duration bonds, Norris said in an interview.
“The rate cycle we are in now, with a lot of volatility and inflation, has created a fixed income market with rates we have not seen for a decade,” Norris said. “Yields for short duration bonds are very attractive now.”
U.S. short-term government bonds are paying more than 4.5% now and that is unlikely to change much in the near future. “The Federal Reserve Board is going to be willing to let interest rates remain high for the next couple of years to fight inflation,” Norris said.
Long duration bonds would not be advantageous until the economy was coming out of a recession, rather than teetering on the brink of entering one, Norris said.
Eoin Walsh, a portfolio manager at TwentyFour Asset Manager, agreed with his colleague that investors have an opportunity to take advantage of rising rates in fixed income now. As rates are rising, even with increases in inflation and the threat of a recession looming, bond investors are now able to reap the rewards of yields that are unusually high for this point in the economic cycle, TwentyFour Asset Manager said
“We do think volatility will remain elevated in the short term, as investors remain nervous about inflation and Russia’s war in Ukraine continues to generate headlines, particularly around energy supplies to Europe as winter approaches. As a result, we think portfolios should be more cautiously positioned,” Walsh said in a recent blog.
Central banks are near their peak point in raising rates, Walsh said.
“At the current interest rate level of 3.25%, we are likely just a hike or two away from the Fed’s terminal rate,” Walsh said. “History tells us longer-dated U.S. Treasury bonds typically peak towards the end of a hiking cycle,” he added. “So, at just under 3.5%, we think 10-year U.S. Treasuries are not far from their peak either.”
The uncertainty of central banks around the world is at the heart of the volatility of markets this year, Norris said. But markets can change quickly.