Global Balanced portfolio positioning intra-quarter update as of 3/25/2022

Increased overweight of corporate bond exposure and modestly extended average duration of the fixed income allocation

March 25, 2022

Actions and Overview:

Shifted exposure from intermediate-term Treasury bonds to short-term high-yield corporate bonds:

• Eliminated an intermediate Treasury bond ETF position
• Established a new position in a short-term high-yield corporate bond ETF

Extended duration of investment grade corporate bond exposure:

• Trimmed an intermediate-term investment grade corporate bond ETF holding
• Established a new position in a long-term investment grade corporate bond ETF

Economic fundamentals in the U.S. remain healthy, in our view, with above-trend growth expected in 2022 and potentially into 2023. We see the near-term risk of corporate defaults as low by historical standards, and the widening of investment grade and high-yield credit spreads in recent months increased the attractiveness, in our view, of credit exposure, and particularly high-yield exposure. Further, the yield curve has flattened, even as longer-term interest rates have risen, and our analysis suggests that this cycle’s peak in long-term interest rates is likely to be lower than in previous cycles. As the economic and rate-hiking cycles progress, and the impact of pandemic-era stimulus fades, we expect economic growth to decelerate. This, along with widened long-term credit spreads, suggests an improved risk/return profile for longer-term corporate bonds. With these adjustments, portfolios retain a shorter duration than the benchmark, but now have a materially higher yield.

UPDATE DETAIL

Shifted exposure from intermediate-term Treasury bonds to short-term high-yield corporate bonds:

• Given our expectation for continued (though slowing) economic growth and limited near-term recession risk, we believe intermediate Treasury bonds are likely to underperform in coming quarters.
• Monetary policy tends to drive intermediate Treasury yields, presenting risk of further negative returns if the Fed tightens more than currently expected, while we believe high-yield corporates should outperform as the Fed hikes rates, as is typical, given very healthy credit fundamentals.
• If Fed hikes do not outpace current market expectations, we believe short-term high-yield securities could still outperform intermediate Treasuries due to their higher absolute yield and a potential narrowing of credit spreads amid ongoing economic expansion.

Extended duration of investment grade corporate bond exposure:

• Interest rates have moved up sharply across the yield curve this year, but we believe the Fed’s launch of a hiking cycle has reduced the risk of a significant additional increase in long-term interest rates.
• Healthy economic growth continues to provide a benign credit environment for corporate bonds, in our view, which could support narrowing credit spreads.
• We expect decelerating growth as the economic cycle progresses should limit further upside risk for longer-term interest rates and eventually support a decline in long-term rates; we have historically seen that longer-duration investment grade corporates tend to outperform as the economy enters slower growth phases.
• In our view, if the Fed raises rates less than expected in coming quarters, longer-term corporate bonds should benefit more from a general pullback in rates across the overall yield curve, while also yielding more than short or intermediate-maturity corporates.