The upward adjustment in bond yields was warranted and isn’t done yet, say the co-chief investment officers of hedge fund giant Bridgewater Associates.
They said the market has re-priced higher-for-longer rates given inflation is still moderately too high, wage growth too high to allow inflation to settle into a target range, labor market conditions too strong to exert a downward pressure on wages and real growth not so weak as to justify an easing.
“Looking ahead, if the T-bill rate stays at 5% or higher, to get a risk premium in bonds you need a bond yield of 5.5% or higher. And given the coming supply of bonds and the withdrawal of central banks from buying them, demand will need to come from private sector investors, who will require a risk premium relative to cash,” says the Bridgewater team.