Why the income case for short-dated bonds doesn’t hinge on an exact interest rate forecast.
If history has taught investors one thing, it’s that certainty on the direction of interest rates is often elusive. The outlook increasingly depends on variables that are notoriously difficult to predict.
Take oil.
The Financial Times recently noted that the correlation between oil prices and the US 10-year Treasury yield had risen to 65%, close to levels last seen around the first Gulf War in 1990.1 This relationship highlights how closely the rates outlook has become tied to developments in energy markets. But oil is notoriously difficult to predict, relying on calls on geopolitics, inflation and central-bank reactions. A difficult task for even the most seasoned market participants.
For us, the more practical question is whether uncertainty over rates should stop investors allocating to fixed income altogether. We believe the answer is no. Indeed, periods like now can create particularly compelling opportunities in short-dated credit.
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