Investing in fixed income in a period of monetary tightening

'At some point the Fed will be ahead'

The Federal Reserve and most of the other central banks in developed countries have made it clear in recent months that reining in inflation is its top priority, and has raised interest rates repeatedly in response.

Unfortunately, the effect of these rate hikes has not been helpful for the traditional balanced portfolio, hurting both shares and bonds. This is a rare occurrence historically. Looking at the data since 1995, the nominal total returns for bonds and equities have both been negative only about 13% of the time, in all cases reverting back to the normal correlation within a few months. This time around, in addition to going higher, US rates may stay elevated for a while, which has clear implications for global markets given the importance of the US economy to the global economy. Inevi...