Key takeaways:
- US Fed easing cycles have varied considerably in timing, tempo and terminal rates since 1990, reflecting the range of shocks and inflation risks impacting the economy
- But both historical evidence and our Yield Book Scenario analysis show the benefits of extra duration in US Treasury portfolios during Fed easing cycles
- Even when the curve steepens and a more modest easing cycle is projected, the 20 year + maturity bucket delivers the strongest returns, overall
- Short maturities have underperformed most in Fed easing cycles since the transition to lower yields, and flatter yield curves, in the early-2000s (the Greenspan “conundrum”)
Points of differentiation:
- By using Yield Book scenario analysis for both curve steepening and parallel curve shifts, we can identify the impact on Treasury performance returns
- In assessing the historical evidence, we examine every Fed easing cycle since 1990, not just the Covid and Global Financial Crisis cycles
- We are also able to attribute returns between principal and interest effects during previous Fed easing cycles, and to show the increasingly dominant role of duration in driving returns
What does our research mean for investors?
With one exception (the mid-cycle correction in the mid-1990s), previous easing cycles show increasing duration in fixed income portfolios, after the first Fed rate cut of the cycle, has enhanced performance returns.
Positive duration effects have overpowered the negative impact of yield curve steepening.
