US economic growth may be surprising on the upside because of a big increase in the federal budget deficit, according to the investment giant Capital Group.
The result is that bond yields may need to stay higher for longer, which markets have been recognising through the sharp rise in Treasury yields since September.
Writing in a blog post, investment director Anmol Sinha points out that while the Federal Reserve has been tightening policy rapidly, the federal budget deficit has increased from around 4% of gross domestic product (GDP) to around 8%.
This is among the largest deficit increases in history, aside from Covid-19, World War II and the 2008 financial crisis. And it's happening when GDP is already growing.
"The good news for fixed income investors is that higher yields can offer attractive income and return potential, while also buffering potential price declines," he says.
"What's more, the price appreciation potential is meaningful should rates fall due to a sharper-than-expected slowdown or other external shock."
An historic opportunity
Within this context, Capital Group's Ed Harrold will be joining an exclusive webinar on Thursday 16 November to discuss the opportunities presented by peak rates.
He'll be joined by Frédéric Taché, head of fixed income at St. James's Place, and Kate Hollis, global head of credit, manager research at WTW.
Hosted by Investment Week, Professional Pensions and Professional Adviser, the panel will consider:
- What does the current interest rate trajectory mean for fixed income?
- Where in fixed income should investors focus their attention?
- How might things play out for different countries around the world?
This post is funded by Capital Group