60/40 Portfolio Lags on Bonds as Hot Inflation Pushes Fed Hike Bets Higher

what happened

According to a Barron's roundup of market commentary, the S&P 500 is holding a year-to-date total return just above 10%, while 10-year Treasury total returns remain negative as yields have risen. A combined 60/40 stock and bond portfolio is running at just above 5% for the year, which would be its weakest result since 2018 apart from the 2022 selloff.

Pimco says the October consumer price index came in hotter than consensus. Together with comments from Fed governor Christopher Waller, the firm sees a stronger case for another rate hike at the December meeting. Its baseline does not yet call for a 50-basis-point move, but its forecast now includes 25-basis-point hikes in both December and January.

why it matters

For markets, the message is that bonds have not been cushioning balanced portfolios this year, since rising yields hit government bond prices as rate-hike expectations build. One commentator argues the balanced portfolio could regain its appeal if equity valuations stay stretched relative to Treasury yields.

market impact

US Treasuries: higher Fed hike expectations push yields up and bond prices down

• ▼US Treasuries pressure down — expectations of further Fed rate hikes lift yields and pressure bond prices

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