Today’s market environment taps into bond investors’ primal fears. Extremely low yields make it tough to find sufficient income and potential return. Economic growth is rebounding from its 2020 collapse, but the world’s grip on recovery is uncertain. Massive fiscal stimulus could resurrect inflation, a long-dormant risk that investors are rusty at addressing. And rebounding growth has fueled rising yields—ironically, contributing to, rather than alleviating, yield-starved investors’ anxieties.

Inflation and Rising Rates: Scanning the Horizon

We agree that the global economy is on the cusp of a new, more inflationary regime. Initial signs may appear as base effects and higher commodity prices push headline inflation in advanced economies temporarily higher. But we don’t expect significant and sustained inflation anytime soon.

We also don’t think interest rates will rise dramatically. It’s likely that global economic growth will accelerate in the second half of the year. But even if inflation begins to materialize, policymakers aren’t inclined to let rates rise too far, too fast, which could endanger a fragile recovery. They’re especially likely to step in if rising yields threaten to knock risk assets off course.

The result? Yields in most markets will probably stay low through 2021. Even in the US, which is likely to grow faster than other developed economies, the 10-year Treasury yield is likely to end 2021 around 1.75%—higher than today, but still lower than pre-pandemic levels.

Don’t Put Your Portfolio on Autopilot

Still, with massive stimulus funds sloshing around the global economy, it’s prudent to be prepared—and that means staying active.