The Outlook for the 60/40 Portfolio

Apollo Chief Economist

There is something weird going on in US government bond markets, and the relentless increase in long-term interest rates is quite ominous for the economy, and perhaps also for financial stability. 

We are late in the cycle, and Fed hikes are biting harder and harder on consumers and firms. Stock markets see the negative effects of tighter monetary policy, and equities are trading lower. But long-term interest rates should be going down, not up.

So what is going on?

With the term premium accounting for the entire move in long rates since July, we know that the source of higher long-term interest rates is not Fed expectations.

If the move is not driven by changing Fed expectations, what are then the reasons why long rates are moving higher? There are several potential explanations:

1) First, with declining repo it could be an unwind of the basis trade that is pushing long rates higher, somewhat similar to what happened in March 2020. This has been getting a lot of attention, and maybe conditions for getting repo are tightening.

2) Another potential explanation is the slowing growth in China, which means that China is recycling fewer dollars into Treasuries because of declining Chinese exports.

3) Rates may also be moving higher because of the Fed still doing QT. Remember, the entire goal with QT is to put upward pressure on government bond yields.

4) The US budget deficit remains big at 6% of GDP, which requires more Treasury issuance today and in the future, and investors may be reacting to that.

5) The US sovereign downgrade has likely had a negative impact.

6) Japan exiting YCC has put upward pressure on JGB yields, which, despite high hedging costs, makes US yields less attractive.

7) There is a large stock of T-bills outstanding, and the Treasury intends over the next six months to increase auction sizes across the Treasury curve.

No matter which explanation is more important, it is clear that the spike in rates is having a very negative impact on consumers and firms, and the risks of a hard landing are intensifying.

For investors in the 60/40 portfolio, the ongoing volatility in a high rates environment is stomach-churning, see chart below. Over the past two months, the 60/40 portfolio has lost 5%, and with an outlook of high rates and slowing earnings—which is needed to get inflation under control—the outlook for the 60/40 portfolio remains negative.

60/40 portfolio down 5% in the past two months
Source: Bloomberg, Apollo Chief Economist. The Bloomberg US BMA6040 Index rebalances monthly to 60% equities and 40% fixed income.

This presentation may not be distributed, transmitted or otherwise communicated to others in whole or in part without the express consent of Apollo Global Management, Inc. (together with its subsidiaries, “Apollo”).  

Apollo makes no representation or warranty, expressed or implied, with respect to the accuracy, reasonableness, or completeness of any of the statements made during this presentation, including, but not limited to, statements obtained from third parties. Opinions, estimates and projections constitute the current judgment of the speaker as of the date indicated. They do not necessarily reflect the views and opinions of Apollo and are subject to change at any time without notice. Apollo does not have any responsibility to update this presentation to account for such changes. There can be no assurance that any trends discussed during this presentation will continue.   

Statements made throughout this presentation are not intended to provide, and should not be relied upon for, accounting, legal or tax advice and do not constitute an investment recommendation or investment advice. Investors should make an independent investigation of the information discussed during this presentation, including consulting their tax, legal, accounting or other advisors about such information. Apollo does not act for you and is not responsible for providing you with the protections afforded to its clients. This presentation does not constitute an offer to sell, or the solicitation of an offer to buy, any security, product or service, including interest in any investment product or fund or account managed or advised by Apollo. 

Certain statements made throughout this presentation may be “forward-looking” in nature. Due to various risks and uncertainties, actual events or results may differ materially from those reflected or contemplated in such forward-looking information. As such, undue reliance should not be placed on such statements. Forward-looking statements may be identified by the use of terminology including, but not limited to, “may”, “will”, “should”, “expect”, “anticipate”, “target”, “project”, “estimate”, “intend”, “continue” or “believe” or the negatives thereof or other variations thereon or comparable terminology.