- About Us
- My Account
The views expressed are those of the author at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.
Interest rates have fluctuated markedly this year and the effects have rippled through broader markets. Asset allocators often ask us how interest rates will change going forward and how their portfolios are likely to react. The answer is nuanced and depends on what’s driving the change: real yields or inflation expectations. These two components of nominal rates may move in different directions (Figure 1) and each can independently impact assets. Understanding these relationships can help investors manage risk and better understand the bets they’re making in portfolios.
We used multivariate regression in which asset class performance is explained by changes in real yields and inflation expectations, as measured by breakeven inflation rates from Treasury inflation-protected securities (TIPS). The betas in Figure 2 are a measure of that sensitivity; they show the percent change the asset class would experience given a one percentage point move in one of the two components, holding the other constant. Assets on the top half of the chart have positive betas to real yields, and those on the right side have positive betas to inflation expectations. To put it in simple terms, assets on the top half of the chart have responded positively to rising real yields and those on the bottom half have responded positively to falling real yields. Assets on the right side of the chart have responded positively to rising inflation expectations and those on the left side have responded positively to falling inflation expectations.
It’s also important to know the statistical significance of the betas. Those that are significant at the 10% level (meaning, simply put, that there is a less than 10% probability the actual beta is zero — i.e., that there is no relationship) are indicated by the symbols shown in the chart key (see appendix for complete results).
As the chart shows, asset class reactions to changes in real yields and inflation expectations have varied widely. Equities have generally responded positively to rising real yields and rising inflation expectations. Importantly, equities have been about twice as sensitive to changes in inflation expectations as they have to changes in real yields. The relationship to inflation expectations is statistically significant for all of the regional equity indices tested, while the relationship to real yields is statistically significant for only half of them.
Commodities have responded positively to rising inflation expectations. In fact, the sensitivity of crude oil to inflation expectations is more than twice that of equities. Neither crude oil nor industrial metals has had any relationship with real yields — both betas are close to zero with virtually no statistical significance. Gold has had the most negative sensitivity to real yields of any asset class tested (meaning it has the most positive response to falling real yields) and the relationship is statistically significant. Thus, if an allocator is concerned about rising inflation, crude oil and industrial metals may be good hedges, while gold may be better suited as…
To read more, please click the download link below.
All figures are for the Wellington Management Group of companies as at 30th June 2022.
Past performance is no guarantee of future performance and can be misleading. Funds returns are shown net of fees.
Source: Wellington Management
Investment in the funds described on this website carries a substantial degree of risk and places an investor’s capital at risk. The price and value of investments is not guaranteed and can go down as well as up. An investor may not get back the original amount invested and an investor may lose all of their investment. Investment in the funds described on this website is not suitable for all investors. If an investor is in any doubt as to the suitability of an investment in a fund, an investor should consult an independent financial advisor. The information on this website does not constitute, and should not be construed as, investment advice or a recommendation to buy, sell or otherwise transact in any security including, but not limited to, shares in the funds. An investor should only invest in a fund once that investor has carefully read and understood the offering documents for the relevant fund, which are the relevant prospectus, and Key Investor Information which contain further information on the risks and features of the fund, and the latest financial reports and any other offering documents for the fund which are available on this Website. Unless stated otherwise data is as at previous month end.