- Bridgewater Associates’ co-chief investment officers believe the market has entered the second stage of tightening
- Changes in economic conditions are not the biggest drivers of changes in yields and asset prices at this stage
- The market has re-priced higher-for-longer rates due to moderately high inflation, high wage growth, strong labor market conditions, and decent real growth
- To get a risk premium in bonds, a bond yield of 5.5% or higher is needed
- U.S. government borrowing on the long end of the yield curve is expected to rise to very high levels
- This new stage of the tightening cycle will likely result in grinding pressure on growth and make the equity market less competitive compared to bonds
- Higher yields and lower prices are likely required to restore risk premiums in equities relative to bonds and bonds relative to cash
- The breakthrough in AI and large language models could boost productivity and make the pricing more sensible
Bridgewater Associates’ co-chief investment officers believe that the market has entered the second stage of tightening. They argue that changes in economic conditions are not the primary drivers of changes in yields and asset prices at this stage. The market has re-priced higher-for-longer rates due to moderately high inflation, high wage growth, strong labor market conditions, and decent real growth. To obtain a risk premium in bonds, a bond yield of 5.5% or higher is necessary. U.S. government borrowing on the long end of the yield curve is expected to rise significantly, surpassing the existing demand to buy bonds. This new stage of the tightening cycle will likely result in grinding pressure on growth and make the equity market less competitive compared to bonds. Restoring risk premiums in equities relative to bonds and bonds relative to cash will likely require higher yields and lower prices. However, the breakthrough in AI and large language models could boost productivity and make the pricing more sensible.
