“It’ll take years to be able to normalize beyond the sort of 2-3% range” that we’re hoping to enter now, said Lee, who holds a doctorate in Mathematics from Oxford University. “Pretty much every country has got a debt burden that corporates or households would struggle to service if yields rose by really quite modest amounts.”
Her strategy? “Sit out taking an active position” when necessary, rather than risk losses. She’s exited most of her overweight positions in inflation-linked bonds.
2023 Hike
Yields on five-year Treasury inflation-indexed securities, for example, plunged to a record minus 2.005% this month as demand for protection surged. Some of these securities are “really fully valued at this point,” she said.
Lee is also underweight gilts on prospects the U.K. economy is likely to expand following an aggressive roll-out in vaccinations.
In the U.S., Lee is keeping close tabs on the Fed’s language and economic data to determine her next moves. Weaker-than-expected U.S. jobs data for April supports her view that sticky inflation may be a pipe-dream, while the Fed could push back a discussion of tapering plans to late 2021.
“Short of rapidly accelerating inflation, it’s difficult to see the circumstances whereby you get rate increases starting before the first half of 2023,” she said. “The era of low real yields and low returns actually may reassert itself sooner rather than later.”
This article was provided by Bloomberg News.