Bond markets de-couple from inflation
Historically, bond yields tend to track inflation’s direction. While over the course of 2024 inflation has trended lower, yields on 10-year U.S. Treasury bonds recently moved higher. After the Fed’s initial rate cut in mid-September,10-year Treasury yields rose from 3.63% to 4.43%.8 “At the moment, improved real economic growth expectations are likely driving bond yields higher,” says Haworth. “Concerns about a growing federal budget deficit may also contribute to higher rates, under the assumption that the Treasury will have to issue more bonds to fund growing deficits.” Investors may demand higher yields to absorb an expanding Treasury bond supply.
How inflation can impact your portfolio
As inflation leveled off in 2023 and 2024, equity markets responded favorably. In late 2024, the S&P 500 is on track to gain 20% or more for the second year in a row. Investors may want to consider an overweight allocation to equities relative to fixed income investments, while retaining a neutral weight in real assets.
At the same time, it’s important to remember that a consistent long-term strategy tends to work to the benefit of most investors. This likely precludes any dramatic changes to your asset allocation strategy in response to today’s capital market environment.
Be sure to talk with your financial professional about what steps may be most appropriate for your situation.