From the studio:

Podcast: Investors Club: Impact of tariffs, AI & policy support on China with CIO's Eva Lee (9:46)
Podcast: Across the Pond: Trump’s next truce? With CIO's Themis Themistocleous (23:23)
Video: Why gold prices can go higher (1:13)
Video: CIO’s Sundeep Gantori: DeepSeek & its impact on the AI value chain (1:46)

Thought of the day

The yield on the 10-year US Treasury has fallen to the lowest level since the Federal Reserve’s hawkish policy meeting in December, amid signs that the US economy is cooling. The bulk of the decline this week came on Wednesday after a softer-than-expected survey of activity in the services sector, which took the cumulative fall since mid-January to nearly 40 basis points.

Whether this move continues could well hinge on the release of today’s US employment report for January. At the Fed’s January meeting, policymakers hinted at a stronger outlook for the labor market, saying that unemployment had “stabilized at a low level,” having previously observed that employment conditions had “eased.” Investors look to today’s data for guidance on whether a cooling jobs market could justify rate cuts in the coming months, or whether further reductions will have to wait until later in the year. The consensus forecast is for a job creation rate of 170,000 in January—below the unexpectedly strong 256,000 from December, though still solid. Investors will also be looking at annual benchmark revisions that have the potential to lead to changes in the previous five years of payrolls data.

Our broader view is that the US economy remains resilient, though risks remain to the outlook given uncertainty over the policy outlook from the Trump administration, especially on tariffs.

Against this uncertain backdrop, we believe high-quality government and investment grade bonds can play an important role as sources of yield and portfolio stabilizers.

We expect appealing returns and potential for capital gains. While yields could rise in the event of a tariff shock or a strong growth scenario, current elevated starting yields should help cushion the total return outlook. The initial yield has historically been a good proxy for longer-term expected returns and return potential, and the current 10-year US Treasury yield remains at the higher end of its distribution since 2008. Over the course of the year, we forecast the 10-year Treasury yield to fall to 4% as inflation cools and the Fed cuts rates further, supporting capital appreciation.

Bonds outperform cash over the long term. Cash’s long-term underperformance compared to other asset classes is a structural phenomenon. With the global rate-cutting cycle still having further to go, putting excess cash, money-market, and expiring fixed-term deposits to work to seek durable income should remain a strategic priority for investors, in our view. Historically, the probability of bonds outperforming cash rises with longer holding periods—from 65% over 12 months to 82%, 85%, and 90% over five, 10, and 20 years, respectively.

Quality bonds can help insulate portfolios if economic growth slows sharply. While recent data have consistently pointed to a strong US economy led by consumer spending, we shouldn’t neglect concerns that US consumer spending will finally “crack” if unemployment rises significantly. In such a scenario, we would expect rapid interest rate cuts as central banks attempt to support demand. Quality bonds would likely rally sharply, helping offset the decline in equities.

So, we continue to view quality bonds as an attractive source of durable income. Investors can also consider diversifying and boosting portfolio income through diversified fixed income strategies, senior loans and private credit, equity income strategies, and structured strategies with capital preservation features.