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A surprising jump in bond yields

October 17, 2023
clock 3 MIN READ

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- Hello, I'm Vivian Estadt, Client Service Director at SEI. I'm here with Chief Market Strategist and Senior Portfolio Manager Jim Solloway to provide a quick preview of one of the timely topics he covers in our most recent Economic Outlook. Jim, markets have been surprised by the resiliency of the US economy this year, and we are starting to see recession fears recede. How do market expectations for the US economy compare to SEI's view?

- Thanks, Vivian. Our view since the start of the year has been that the US economy would display a fair degree of resiliency, led by robust consumer spending despite high inflation and lagging inflation adjusted incomes. This being said, the biggest surprise of the past quarter in SEI's view is the jump in bond yields in the US and in other major countries, even as inflation rates across most geographies have turned lower. The chart on the screen highlights how government yield curves of the US, United Kingdom. and Germany have all shifted higher since this time last year. As seen on the left hand side of the chart, shorter maturities have risen dramatically in all three countries. The increase in yields in the belly and at the longer end of the curves is less extraordinary, but significant nonetheless. Whereas the US yield curve was already inverted this time last year, now all three countries' curves have inverted. It has taken a while, but this big shift in the structure of rates is slowly squeezing the major economies, and stresses and strains are now accumulating. It would appear that the so-called long and variable lags of tighter monetary policy are beginning to take hold across the globe. Germany, the UK, and other developed economies are showing increasing signs of weakness. In emerging economies, hopes are dwindling that an economic rebound in China will offset slowing growth elsewhere. Economic data from the world's second-largest economy have largely been disappointing, and consumer sentiment remains deeply depressed.

- If the global economy begins to cool as you suggest and central banks are pressured to cut policy rates in the next year, do you expect to see bond yields begin to fall in response?

- Not exactly. We expect that sometime next year, central banks will begin to cut policy rates, but we think that longer term bond yields could stay elevated at or above today's levels. This is largely driven by an upward trend in inflation adjusted yields. SEI thinks the jump in government bond yields, whether in the US or other advanced economies, is a structural shift. Recession may place temporary downward pressure on bond yields, but we expect them to stay appreciably above the levels that many observers have considered normal since the global financial crisis of 2007-2008.

- Thanks, Jim. We always appreciate your insights. SEI is focused on the major issues that are of interest to our clients. We incorporate these discussions into our advisory process as the impact varies based on each client's goals. For more of SEI's insights, read our latest economic outlook available on our website.

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