Because the Fed is printing new money to accommodate fresh policy stimulus, we believe it could increase inflationary pressures in the US. Due to the US trade deficit, inflation can be exacerbated by further erosion in the value of the greenback when consumer activity does pick up.1 The heightened risk is not solely due to the rate at which money is printed but also because the US’s money supply started from a relatively larger base this year.
The projected increase in Treasuries could impact the Bloomberg Barclays US Aggregate Index.2 As a result, investors could have more Treasuries, more duration and less yield in the index. Therefore, by focusing on just the US investors are more concentrated and possibly getting less real return than can be found abroad. In turn, by diversifying across regions, investors may have an opportunity to gain exposure to higher yield in countries that are well positioned globally and have lower leverage.
Scott Zaleski, portfolio manager, Mellon.
1 The Bond Buyer: What does the future hold for inflation? September 1, 2020.
2 The Bloomberg Barclays US Aggregate Bond Index is a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the US.