“One way to think of longer maturity bonds, i.e., 10- to 30-year, is as a low-cost insurance policy on something going wrong with the economy,” McIntrye says. This approach is based on the belief that in two out of three scenarios—whether the Fed holds rates steady or cuts them—U.S. Treasuries are likely to offer positive returns. However, there is one scenario where these bonds might underperform: a “fat-tail” event, which is an unexpected and highly unlikely strong rebound in economic growth accompanied by a recovery in inflation. In such a case, the Fed might be compelled to hike rates, which could adversely impact bonds.
The economy is becoming more divided between lower-income, non-asset-owning consumers who are under increasing financial strain, and their wealthier counterparts. This economic divide may signal potential challenges ahead, as such divergence is not sustainable and…
