Options markets hint at fertile environment for asset allocation
Forward-looking signals indicate a favorable environment for equities and bonds as financial markets adjust to a higher-rate regime that rewards diversification, argues Global Head of Asset Allocation Ashwin Alankar in his 2024 outlook.
5 minute watch
Key takeaways:
- Options markets can offer powerful insights into the future, and they are signaling a potential Goldilocks scenario as higher interest rates continue to quell inflation.
- With downside risk diminishing, we believe options markets are signaling attractiveness in equities, a possible ceiling on rates, and the opportunity to extend out along the credit curve.
- The higher interest rates that should accompany the new inflation regime will likely give central banks less latitude to counteract economic downturns, meaning that, in our view, cross-asset diversification will take on greater importance.
10-Year Treasury Yield is the interest rate on U.S. Treasury bonds that will mature 10 years from the date of purchase.
Basis point (bp) equals 1/100 of a percentage point. 1 bp = 0.01%, 100 bps = 1%.
GDP = Gross Domestic Product
A yield curve plots the yields (interest rate) of bonds with equal credit quality but differing maturity dates. Typically bonds with longer maturities have higher yields.
IMPORTANT INFORMATION
No investment strategy can ensure a profit or eliminate the risk of loss.
Any risk management process discussed includes an effort to monitor and manage risk which should not be confused with and does not imply low risk or the ability to control certain risk factors.
Actively managed portfolios may fail to produce the intended results. No investment strategy can ensure a profit or eliminate the risk of loss.
Diversification neither assures a profit nor eliminates the risk of experiencing investment losses.
Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.
High-yield or “junk” bonds involve a greater risk of default and price volatility and can experience sudden and sharp price swings.
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5 minute watch
Key takeaways:
- Options markets can offer powerful insights into the future, and they are signaling a potential Goldilocks scenario as higher interest rates continue to quell inflation.
- With downside risk diminishing, we believe options markets are signaling attractiveness in equities, a possible ceiling on rates, and the opportunity to extend out along the credit curve.
- The higher interest rates that should accompany the new inflation regime will likely give central banks less latitude to counteract economic downturns, meaning that, in our view, cross-asset diversification will take on greater importance.