Perspective :

Market briefing: Inflation higher for longer

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How do you position bond portfolios for today’s market environment?

When inflation is low, and interest rates are falling, aggregate bond indexes can perform well. However, today’s bond market environment appears to be remarkably different than that of the past. The new mantra? Higher for longer. Higher interest rates and higher inflation for longer than most investors have considered. But is anyone doing anything about it?

Here’s the problem: Many investors don’t tend to focus too much on the bond positions in their portfolios. The notion is that index bond positions or static allocations are good enough, and the mantra is to set it and forget it. 60/40, 70/30, 30/70 type stock-to-bond allocation portfolios had become ubiquitous in the sleepy low inflation low-interest rate environment. During that era, aggregate bond indexes and static allocations were fine for investors. But how should an investor be positioned if inflation ends up being higher for longer, if the yield curve reverts to normal, or if yields amongst bonds are highly dissimilar? It is painfully clear that today’s bond market looks nothing like the last decade’s, so why are investors still holding the same basic bond exposures?

To better understand how to position portfolios for today’s bond market, there are two important factors: the inverted yield curve and yield differentials between different types of bonds.

1. A record inverted Treasury yield curve

An inverted yield curve occurs when short-term treasury bonds have higher yields than longer-term bonds. Typically, the treasury yield curve is upward-sloping, where longer-term bonds have higher yields than shorter-term bonds. There are several implications of the inverted Treasury yield curve:

  • Short-term bonds have a higher expected return (yields) than longer-term bonds.
  • Expectations are that the Fed will continue to raise rates, pushing short-term yields even higher.
  • If an inverted yield curve is to revert to a more normal upward slope, longer-dated bonds must underperform shorter-dated bonds. This outcome seems plausible if we end up with inflation higher for longer.
  • Aggregate bond indexes often focus on high-quality and longer-dated bonds, which may likely end up being poor positioning for the current environment. Maybe the opposite positioning of short-term and higher yielding bonds makes more sense.

2. Relative value and margin of safety

Do yields matter? Today (March 8, 2023), high-yield bonds yield about 8.4% as measured by the ICE BofA U.S. High Yield Index, while the 10-year treasury bond yield is 3.9%. Conversely, inflation is 6.4% (trailing 12 months as of January ‘23). If yields are a good approximation of long-term expected returns, high-yield bonds at least stand a chance of outperforming inflation. Secondly, if the yield curve is pressured upward, higher-yielding bonds have less duration than aggregate indexes. Thus they may provide an added margin of safety in the event of inflation higher for longer.


Static bond allocations implemented with basic bond indexes are ok for investors if inflation is low or if interest rates are falling. However, today’s bond market presents investors with a remarkably different environment than any time in the past 10+ years. The outlook for the bond market appears to be the exact opposite of that of which investors are used to or how they are positioned.

At Frontier, our strategies are not dogmatically stuck in index positions or shackled with basic static allocations. We believe in independent thinking and independent choice. Frontier’s forward-looking investment process accounts for these changes in the bond market environment. We can also choose from almost any mutual fund or ETF in implementing our strategies, further refining our ability to define our outcomes. Bond positioning may sound boring, but today it will likely significantly impact investors’ return for risk outcomes. So, what’s happening in your portfolio?

Certain information contained in this presentation has been obtained from third parties. While such information is believed to be reliable for purposes used herein, no representations are made as to the accuracy or completeness thereof and none of Frontier Asset Management or its affiliates take any responsibility for such information. Certain information contained in this presentation discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice.

Inflation is the decline of purchasing power of a given currency over time. A quantitative estimate of the rate at which the decline in purchasing power occurs can be reflected in the increase of an average price level of a basket of selected goods and services in an economy over some period of time. The rise in the general level of prices, often expressed as a percentage, means that a unit of currency effectively buys less than it did in prior periods.
It is generally not possible to invest directly in an index. Exposure to an asset class or trading strategy or other category represented by an index is only available through third party investable instruments (if any) based on that index.

Exclusive reliance on the information herein is not advised. This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise of future performance. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Assumptions, opinions and estimates are provided for illustrative purposes only. They should not be relied upon as recommendations to buy or sell any securities, commodities, treasuries or financial instruments of any kind. This material has been prepared for information purposes only and is not intended to provide, and should not be relied on for, accounting, legal, investment or tax advice.
Frontier Asset Management LLC is a Registered Investment Adviser. The firm’s ADV Brochure and Form CRS are available at no charge by request at or 307.673.5675 and are available on our website They include important disclosures and should be read carefully.

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