Is it too soon to buy duration?

On the macro outlook for the next year forward, I think a few formative things are really transpiring right now. One is more clarity on the direction of inflation, which is clear signs of more disinflationary trends versus reinflationary trends that we've seen over the last year looking back. So, inflation is heading in the right direction. And the implications of that is that central banks, which have fought hard to tame and tackle inflation, now see the final mile or kilometre of that goal within their sights. We're also getting closer to terminal policy rates here. And that's going to bring a couple of things to the macro front. It's really going to help ease the volatility that we've seen in interest rates. This means a devolatilisation of government bond yields across the curve, which should be conducive for investors reassessing their portfolios and looking at fixed income again. So, potentially ongoing positive inflows from investors back into fixed income, which has been challenged due to macro events over the last year looking back.

Have central banks slowed rate hikes too soon?

We would say no. So when we think about what central banks have done, it's been an incredible amount of not only the speed, but kind of the duration of time in which those hikes were done to catch up to fighting inflation. 

And when we look at the economic data and projections going forward of trends around inflation, there's a lot of affirmation that some of the components of inflation clearly are already in disinflationary territory. 

Central banks are in restrictive territory, they would even say that themselves. There is a combination of disinflationary signs already emerging in goods inflation expectations and signs of that already happening in shelter inflation. And the wages inflation is starting to show some signs of softening in addition to the level of interest rates now being restrictive. In our view, this means central banks for now can pause and assess the lagged impacts of what they've done over the last year plus in terms of raising policy rates to the level they're at today.

Where along the duration spectrum do you see value emerging?

There's a couple ways of looking at it, but right now the way we're thinking about it, and I think also matches with other periods of inversions to yield curves, which is a function of everything that's happened in the last year and policy rates being recalibrated significantly higher, would be that it's rational to start extending some duration here in bond portfolios. 

Five or six years of duration is the sweet spot in our view. 

But I think it also provides additional optionality in terms of locking in that income today if you're focused on income in your fixed income portfolio and the potential for that to generate additional total return. As and when economic growth slows at some point in the future, those bond yields should rally, bond prices go up. And that should add to the kind of attractive levels of income you're already receiving on intermediate duration type of parts of curves.

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