The benchmark U.S. 10-year Treasury bond yield is hovering near 4.3%, its highest rate in nearly 16 years. Economic data keeps fueling the theory that the U.S. economy is running hot and inflation will remain elevated. The fear is the Federal Reserve will respond accordingly, staying vigilant and keeping its fed funds rate high, or even lifting rates higher. This is counter to earlier forecasts that the Fed could start to lower rates by year-end or in the beginning of next year. The U.K. is seeing a similar trend. The U.K.’s 10-year benchmark bond yield is at 4.5%, up 130 basis points from a year ago. Sentiment there is also growing that higher rates might be elevated for longer than initially expected, as the U.K. has experienced rampant inflation in the past year. Elsewhere around the globe, political uncertainty in South Africa and Brazil are keeping sovereign-debt interest rates in those countries above 10%. Russian debt is above 12%, up 300 basis points from a year ago, as the conflict with Ukraine drags on. At the extremes amongst the biggest nations, Turkish government debt has doubled in the past year to nearly 22%, while yields for Japanese debt remain low at 0.6%. From a portfolio perspective, we would avoid over-weighting foreign-government fixed-income securities at this time, given their volatile yields, sovereign risks, and repatriation issues.
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