Bonds, Ballast, and Lower for Longer
Today’s demographics, debt levels, economic growth, and technology represent a dramatic departure from historic norms.
Many would say that we've run for 35 years and rates really can't go a whole heck of a lot lower. My retort would be don't be so sure.
…right now we're talking about low inflation that looks like it's going to stay low for a fairly long time.
What does that mean? Well, it means a handful of things. If you're thinking about a bond allocation, it means that inflation is unlikely to rob you of your future returns in the way that inflation might if it were running at a higher level.
Bonds are supposed to provide you a ballast against the risk of holding equities. Even at these very low levels, I think they can still very much do that, especially if, as I believe, yields wind up staying in a fairly low envelope for the rest of this business cycle.
Low but constant inflation is usually fairly reassuring to equity investors. Again, for very much the same sorts of reason, it results in low volatility. It gives you more confidence about investing in the future and what that return will be. Whereas high and volatile inflation results in uncertainty, results in higher volatility and would result in a lower level of investment than you might see otherwise.
I think we are supposed to jettison the past as we try and think about the present and the future...The demographics are different. The level of debt is different. The calcification of the global economy, I think, feels very different…Therefore, we should take down our expectations as to where rates could go.
The views expressed in this commentary are those of Erik Weisman and are subject to change at any time. These views should not be relied upon as investment advice, as securities recommendations, or as an indication of trading intent on behalf of any other MFS investment product.