Last week, US stocks were close to all-time highs. U.S. 10-year bond yields jumped to nearly 4.40% ahead of the Federal Reserve’s expected rate cut.
Main points
- Diversify in a context of transformation: We see an ongoing transformation that makes a wide range of outcomes possible. This changes how we evaluate portfolio diversification and the drivers of risk and returns.
- Market context: Last week, US stocks were close to all-time highs. U.S. 10-year bond yields jumped to nearly 4.40% ahead of the Federal Reserve’s expected rate cut.
- The week ahead: Even if the Fed cuts rates further in 2025, markets appear to align with our view that persistent inflation means policy rates will remain well above pre-pandemic levels.
We believe economies are undergoing a transformation that could continue to influence long-term economic trends. This creates a wide variety of potential outcomes and, in our view, requires the use of scenarios to guide portfolio construction. In this new context, government bonds have become a less reliable cushion against declines in risky assets. Therefore, investors should consider new diversification assets – not as a substitute for bonds, but to diversify their exposure to differentiated risk and return drivers.
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