Economic Performance & Outlook

Higher rates making bonds more interesting

In our last note we talked about inflation rearing its head in the global economy in a way that hadn’t been seen for decades. It’s important to consider inflation because it’s a determinant of the value of all kinds of assets – at its most basic, it reduces the value of cash that you hold, and it’s intimately related to interest rates and the value of fixed income – bonds!

The Covid pandemic saw inflation reassert itself in a manner not seen in the major economies since the 1990s. Supply constraints bought on by the pandemic pushed up the price of basic materials, which then rippled across the rest of the economy, alongside a surge in energy prices after Russia invaded Ukraine. The reaction of central banks in the US and in Europe was swift, with monetary measures designed to slow borrowing and rein in those prices – in the US interest rates have gone from 0.25% to as much as 5.5% in just a year and a half, with policymakers repeatedly saying that they will not let up until they bring inflation under control.

Have they managed to do that? Inflation in the US recently has been hovering around 3-4%, down from 9% a year ago, getting closer to the Fed’s target of an annual 2%. As yet, the economy has avoided a recession – the risk policymakers always face when they try and damp demand by pushing up the cost of borrowing. However, there remain areas of concern in the US, with an especially tight labour market. In Europe, inflation is still relatively high, much of it driven by rising prices for food. What’s notable is that the drivers of inflation are no longer what they were – the price of oil has dropped markedly from its post-Ukraine invasion peaks, while the supply chain issues of Covid are now less of a concern.

What this means is that the push on prices may well extend further into the future than originally thought, changing the market’s view of prospective interest rates. Bond values, with their fixed returns, have really struggled in this environment.

Fixed Income

Bond performance over past year
All bonds 10+ years, 26/09/2022 – 26/09/2023, local pricing 

One of the repeated claims in our notes of recent years has been the disappointing returns from bonds, especially amid the low inflationary environment of the early part of the century. Negative yields were commonplace in German government debt, one of a handful of global benchmark securities, which meant essentially you were paying for the privilege of holding bunds.

Originally, inflation was thought to be a short-term concern so the increase in bond yields to compensate for inflation was most marked on shorter-dated debt. With inflationary pressures and corresponding higher interest rates now anticipated to extend further into the future, this has pushed up the yield on longer-term securities. As important, the factors that had held interest rates low for so long in previous decades – the rise of China as a global powerhouse alongside the quantitative easing that followed the financial crisis – are unlikely to be factors underlying the global economy in the years to come.

US 10-year Treasuries now yield over 4%, while those German rates which were sitting happily below zero are now up at about 2.6%. More important is the real yield that investors are now getting – the difference between what bonds are paying over and above inflation. US 10-year Treasuries have a real yield of about 1% while USD money market funds, returning about 5%, are showing an even more positive gap. The bottom line is that government debt now looks more investable than it has been for a very long time and  given that it is such an important part of any client portfolio, this might herald some important changes in what we are recommending in the future.


Equity performance over past year
26/09/2022 – 26/09/2023, local pricing 

Equities aren’t quite behaving as we’d expect them to in the present environment. Normally an increase in interest rates puts a brake on demand which lowers the earnings of companies and reins in equity prices. Instead, the exact opposite has been happening, with markets such as the US returning close to 90% since their 2020 low point. This year, the S&P 500 index, a broad measure of the US stock market, has gained about 30%. Gains elsewhere have been more modest but still positive – the Euro Stoxx 50 index has climbed about 12%.

Looking behind the numbers though, in the US especially this has been driven in large part by extraordinary gains from a very few well-known tech businesses – Alphabet, the company behind Google, is up 56%, while Meta, the business behind Facebook, has climbed 150%. Bear in mind though that these stellar returns come after significant declines last year for many of these tech titans, so the gains need to be considered in that context.

However, the broader point remains – the economy is in a precarious position, and with interest rights high – and possibly rising further – there’s every chance that the economy may start to slow down considerably. It is therefore important to note the equities have considerable potential to fall in the current environment.


Property in general has longer cycles than the equity market which can make it useful as diversifier. We believe European property has a positive long-term outlook as it is coming from a period of rental weakness, although there may be short-term declines as interest rates rise and while the prospect of a recession remains.


Commodity performance over past year against equities

26/09/2022 – 26/09/2023, US dollars

Commodity markets move on many factors including geopolitical vagaries – the recent efforts by Saudi Arabia to reduce oil supplies being an example. With significant volatility – they’ve climbed and then reversed gains recently – they can add diversification within portfolios with a truly long-term horizon, but are otherwise best left to serious risk takers.

Hedge Funds

Hedge fund performance over past year against equities

26/09/2022 – 26/09/2023, US dollars, hedge funds priced monthly


Hedge funds can make an appropriate investment because of their defensive qualities in a market downturn but generally incur high management fees and tend to underperform during bull markets.

Currency Funds

These funds have shown gains and losses recently. They are useful as a diversifier because of the relative independence from other securities but can experience significant volatility over the short term.

Multi-asset Funds

There is little useful information with which to assess these funds for their performance, but many have struggled to deliver on their stated investment objectives (typically cash plus 4-5% or 2/3rds of equity performance). Because of the very wide range of investments they hold, they provide useful diversification, and the ability to dynamically shift asset allocation can provide some protection in times of equity market corrections.

Senior loans

These floating-rate sub-investment grade securities offer a premium over cash and are useful for diversifying a portfolio.