Massy: I heard you, Greg, say something about bond volatility in the short term as we see rising interest rates; and there was a lot of question around that. Sara, Richard from Nebraska is wondering what to expect over the next few years based on the most recent Fed announcement to raise rates.
Sara: Thank you for your question. Well I would say, Massy, as Greg mentioned, rising rates as policy normalizes—the central bank's starting to raise rates—is likely to result in some short-term volatility. Now, the good news is higher rates implies higher future returns. And as Greg mentioned, our fixed income outlook for the next decade has been ticking higher. It's now in the range of, returns in the range of 1-1/2 to 2-1/2%, which is higher than we thought last year.
When we look outside the U.S., expected returns are going to be a little bit lower than the U.S. Now, that being said, we do find value in buying hedged global bonds because there's a diversification benefit. It helps insulate against results and risks that are specific to the U.S.
If I look at another sector of corporate credit, for example, U.S. investment grade bonds are expected to outperform Treasuries over the long term. But we would say that given where valuations are, the return that you get for taking on that excess credit risk has been chipped away. So still expected to outperform but less so than it has in the past.
And then finally, I'll touch on munis. Muni rates we also expect to be going higher, largely tracking in line with Treasury rates. Now for a muni investor, this can actually be really good news because in the future this gives them potential for more tax-exempt income.
So I think overall I would probably summarize it by saying, Yes, returns are still expected to be low in fixed income markets, but if we learned one thing during the COVID-19 crisis in the market, it's that power of bonds as insulation when the equity market is selling off.