Bond yields enter new trading range, time to add duration: Strategist

A lot of the focus right now on on on yields and that 10-year yield which is at its highest levels in about 20 years. And if you go back 20 years, we did have something that was called the global financial crisis back then. Is there perhaps a concern that we might be coming to these risk-off levels right now where markets become more volatile and uncertain and perhaps for foreshadowing perhaps risks we haven't seen in about two decades heaven forbid. >> Yeah, well good morning and and thank you very much for having me on the show. Yeah, as you point out, you know, the bond markets have been through a dramatic dramatic adjustment. Last week was a very volatile week. We looks like the tectonic plates, the sort of the underpinnings of the fixed income have really started to move. And as you just went through the narrative of sort of what's going on in the world, you can't look at anything in isolation. You have to look at the full picture, the integrated sort of the integrated kind of connection between different factors. And so, we look at a at a market where we've got tension between between monetary policy and fiscal policy. It's not just in the US, but around the world. Governments want to spend, but the central banks are starting to pull back. That's on the one hand. We've got bond yields going up as you mentioned. Here in the US, 10-year yields at a almost 30-year high. In Japan, we're at more than 40-year highs. So, bond yields are up, but they're up both in in nominal terms and very much in real terms. And not only that, bond yield curves are flattening. The dollar is strengthening. We see this multitude of signals that's telling us that capital markets, really underpinned by the bond market, are starting to show some signs of strain. There's plenty of money out there. There's plenty of credit that's available, but the competitive nature of borrowing means every single borrower is in competition with each other. These are factors that are a result of an economy that's growing here in the US, but also around the world. It's one where geopolitics keeps supply chains very, very tight. And then we know that labor is not perhaps moving around as much as it once did. So, we have these constraining factors. They're not going away. And in our opinion, what we saw last week was a breakout in bond yields to a new trading level. So, 10-year yields and 5-year yields now well above 5% and we're likely to stay here for the foreseeable future. So, the market is trying to adjust to these new yield levels. And what is very important, small moves in bonds take a long time to affect the economy. >> Well, George, I guess the question here also is what would if if volatility continues to to increase as well, is it wise to be long duration on in the bond market at the moment because we've seen volatility and uncertainty at least in yields continue to creep up and this also might not play out very well for long duration plays out there. What do you What do you say to that and is there still a case to be longer duration in this volatile environment? >> So, for most of this year, I would say up until just a few weeks ago, we've been really sort of emphasizing our duration at the front end of the yield curve. Shorter maturity bonds, two, three, four, five-year parts of curves here in the US and around the world. We did not want to take a lot of duration. Duration gives you a lot of price sensitivity to interest rates and that was not a good trade, not a good bet earlier this year. We fast forward to today, that was a good strategy a couple of months ago. Today, yields are materially higher. That's number one, the value is there. Number two, central banks are now starting to move on behalf of bond holders. They are tightening monetary policy. That is in an effort to try and slow growth, to try and contain inflation, to try and do the things that bond holders like to see that helps to move bond prices higher in the future. So, our message to investors is that now is actually a good time to start to add some duration to your portfolios. Those two-year bonds can be pushed out to five to seven, maybe the three to five-year bonds can be pushed out to maybe the 10-year part of the curve. And what I like to say to clients and to anyone else that will listen, a little duration goes a long way in these markets. This isn't sell all my cash, buy all long bonds. This is about incrementally adding duration to your portfolio. Pick up the extra yield and then buy some downside protection for yourself because the cumulative effect of tighter monetary policy, higher yields, flatter yield curves, higher energy prices, now marginally tighter credit spreads, that should start to weigh on growth at least a bit and that's good for bond holders.