NextFin News - Schroders Plc has begun shifting its multi-asset portfolios toward government bonds, a defensive pivot driven by mounting evidence that the global economy is drifting into a period of stagflation. The London-based asset manager, which oversees approximately $970 billion, is reducing its exposure to equities in favor of sovereign debt as the combination of slowing growth and persistent price pressures complicates the outlook for risk assets.
Sebastian Mullins, Head of Multi-Asset and Fixed Income for Australia at Schroders, argues that the traditional "soft landing" narrative is being undermined by a resurgence in commodity prices and the potential for protectionist trade policies under U.S. President Trump. Mullins, who has historically maintained a pragmatic, data-dependent stance on asset allocation, now suggests that the risk of a "no landing" or stagflationary outcome has risen to a level that warrants a structural increase in duration. His view is that government bonds, particularly U.S. Treasuries, have regained their status as a reliable hedge now that yields have reset to higher levels.
The shift comes as the U.S. 10-year Treasury yield reached 4.43% on April 29, reflecting a market that is increasingly pricing in "higher-for-longer" interest rates. For Schroders, these yields represent an attractive entry point, providing both income and a buffer against a potential economic downturn. Mullins notes that while inflation remains sticky, the cooling of the labor market and a deceleration in consumer spending are beginning to weigh on growth projections, creating the classic stagflationary squeeze that typically penalizes corporate earnings more than fixed-income returns.
This defensive posture is not yet a universal consensus across the City or Wall Street. While Schroders is leaning into bonds, several sell-side desks at major investment banks continue to advocate for "equities over bonds," citing the resilience of technology earnings and the possibility that inflation will eventually settle near the Federal Reserve's target without a recession. The Schroders position currently represents a more cautious minority view, predicated on the belief that the market is underestimating the inflationary impact of proposed U.S. tariffs and the geopolitical volatility in the Middle East.
Energy costs remain a central pillar of the stagflation thesis. Brent crude oil is currently trading at $103.85 per barrel, a price level that acts as a tax on global consumption while keeping headline inflation figures elevated. Mullins points out that as long as energy prices remain structurally high, central banks will find it difficult to pivot toward aggressive rate cuts, even as growth signals flash amber. This environment creates a "valuation ceiling" for stocks, making the fixed coupons of government debt increasingly competitive.
The success of this strategy hinges on the correlation between stocks and bonds returning to negative territory. During the inflationary spike of 2022, both asset classes fell in tandem, stripping investors of the benefits of diversification. Schroders is betting that in a growth-scare scenario, bonds will once again rally as investors seek safety, even if inflation hasn't been fully defeated. However, if inflation remains the primary driver of market volatility, the "warmth" toward government bonds could quickly cool as yields move even higher to compensate for eroding purchasing power.
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