Systematic Fixed Income Outlook

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Peak inflation appears to have arrived. What’s next? The central bank narrative has shifted from a focus on the pace of tightening to the terminal rate required to bring inflation back down to the targeted level. Throughout 2022, expectations for peak inflation have been continually disappointed. Now, signs are emerging that we’ve reached peak inflation. Heading into 2023, the likelihood of bringing inflation down to the targeted 2% rate depends on whether policy is sufficiently restrictive. History suggests that this may take longer than markets expect. The level of policy rates required to conquer inflation will have great implications on market returns and the durability of the 60/40 portfolio.