January 2022 was one of the worst-performing months for the Bloomberg US Aggregate Bond Index (the Agg)1 during the past 20 years. Much of the blame can be placed squarely on steadily increasing rates. Yields on the benchmark 10-year US Treasury note2 spiked from 1.49% at the start of the current year to 2.00% in early February. The pattern seemed to echo early 2021 when rates began the year at 0.90% before ending the first quarter at 1.74%. Yes, the 10-year did drop back to 1.17% in August 2021. But as of this writing in February 2022, it sits at a level even higher than last year’s peak.
Even after an up-and-down year for rates in 2021, some investors have decided that the party has ended and rates have nowhere to go but up. After all, they’d argue, inflation breakevens3—which are the market’s expectations about forward inflation—have been consistently at their highest levels since 2008 for the past several months. Theoretically, this would point to higher future long-term rates.
Around the world, the travel, leisure, and hospitality sectors, which saw steep drops in activity after March 2020, have slowly rebounded. More and more individuals are getting vaccinated. In addition, a year of historic stimulus in 2021 provided consumers with significant spending power, even as their buying binges helped unleash chronic supply-chain and labor shortages.
Ordinarily, these data points would signal a rotation away from duration4-sensitive assets into areas most likely to benefit from inflation. This all makes sense—in theory. But a strong counter-argument suggests that holding duration in some form may be the better bet for investors.