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CONTRIBUTORS

Wylie Tollette, CFA

Chief Investment Officer,
Franklin Templeton Investment Solutions

Tom Nelson, CFA, CAIA

Head of Market Strategy
Franklin Templeton Investment Solutions

Miles Sampson, CFA

Head of Asset Allocation Research,
Franklin Templeton Investment Solutions

Key takeaways:

  • The US Treasury yield curve (three-month vs. 10-year) is no longer inverted; cash no longer has a carry advantage. For those in cash, reinvestment risk remains as policy rates are expected to move lower over the upcoming year.
  • Federal Reserve (Fed) rate-cut expectations have moderated significantly. Market pricing is now slightly more hawkish than Fed expectations.
  • Fed rate-cutting cycles have typically produced higher returns for US Treasuries than cash. Credit has typically outperformed in periods where a recession was avoided, which is our base-case scenario.
  • Our assumptions for US Treasury fair value show positive asymmetry for potential returns.
  • One unique risk is US fiscal policy and debt sustainability, which will be in focus in 2025.

History suggests that income investors would be well served by rotating out of cash and into a diversified fixed income basket, if they have not already. Income-oriented investors are now receiving meaningfully higher yields relative to cash rates. Event studies around Fed rate-cutting cycles and reinvestment risk support this rotation. Furthermore, we believe there is now some value in current Treasury pricing, as Fed policy expectations have moderated significantly, and the US term premium has risen. Despite future fiscal policy uncertainty, which could lead to higher Treasury yields, we think it makes sense for those seeking yield to begin rotating out of cash and into other fixed income assets.

WHAT ARE THE RISKS?

All investments involve risks, including possible loss of principal. Past performance is no guarantee of future results. 

Fixed-income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls.  Low-rated, high-yield bonds are subject to greater price volatility, illiquidity and possibility of default.

Active management does not ensure gains or protect against market declines.

IMPORTANT LEGAL INFORMATION

This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice.

The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market.

Data from third party sources may have been used in the preparation of this material and Franklin Templeton Investments (“FTI”) has not independently verified, validated or audited such data. FTI accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments opinions and analyses in the material is at the sole discretion of the user.

Products, services and information may not be available in all jurisdictions and are offered outside the U.S. by other FTI affiliates and/or their distributors as local laws and regulation permits. Please consult your own professional adviser or Franklin Templeton institutional contact for further information on availability of products and services in your jurisdiction.

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