Economy continues to surprise to the upside: Strategist

The global bond market is experiencing a sell-off as investors rethink the Federal Reserve’s rate cut path ahead. Gargi Chaudhuri, BlackRock Americas chief investment and portfolio strategist, joins Morning Brief to discuss the movement and how traders can best navigate the bond market moving forward. “The move not just this morning, but over the course of the last month or so, in especially the long end of the bond market, has certainly been something that investors have been focused on. And particularly what I tend to look at is how much of the move in ten-year nominal rates coming from real rates and then expectations of inflation… What we’re finding now is that, yes, real rates have certainly moved higher. So we’ve sort of moved up from that 160 level to about the 190 or so level. But at the same time, expectations of inflation or ten-year breakevens have also moved wider,” Chaudhuri tells Yahoo Finance. She notes that the economic backdrop has shown a “surprise to the upside,” given the most recent data from the labor market to retail sales. Meanwhile, the bond market is pricing in stickier inflation. Thus, she encourages traders to focus on “the belly of the curve” and play the three- to five-year part of the curve rather than the longer end, especially as she expects steepening to occur throughout the fourth quarter. While some are pointing to the so-called Trump trade as a reason behind the bond market sell-off, Chaudhuri argues, “regardless of who’s in the White House come 2025, one of the things that we’ve been talking about with our clients is just this expectation, unfortunately, of rising deficits… that is something that’s probably not going to come down, and again, that is something that the bond market is perhaps is sniffing out a little bit.” An increasing US deficit could certainly play a part in the steepening of the curve, however, she believes it is “certainly also related” to forward growth expectations. She encourages traders to keep “quality at the core of your portfolio” and to gravitate slightly toward value stocks.
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