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Investment Outlook

Rising rates, rising risks

Nicholas Liolis
Chief Investment Officer, TIAA General Account
A square prism refracts light

We’re only one quarter into 2021, and it has already been a challenging year for bond investors. The 10-year U.S. Treasury yield has almost doubled as inflation fears tick up on the back of a tumultuous 2020 when the U.S. Treasury and the Federal Reserve supported the economy and markets by buying bonds, injecting liquidity and keeping rates low.

As inflation uncertainty increases and with it interest volatility and term premiums, will the Fed need to step in to align the markets with its forward guidance? How can the Fed anchor investor expectations? These questions are causing many investors (us included) to grapple with the uncertainty of future fixed income returns.

A credit market bull run

Even though we’ve arguably just been through one of the biggest economic shocks of our lifetimes, credit markets still seem to be enjoying the bull run that began way back in 2009. In usual cycles, most of the credit excesses are cleaned out in a recession. But that didn’t happen in 2020. The equity markets took a hit early in the year but quickly recovered, bolstered by the Fed’s and the Treasury’s actions. Corporate defaults did not reach the levels expected (and were primarily focused in hard-hit COVID-related sectors) and the bull market in credit effectively continued, while corporations and governments took advantage of the environment and issued record amounts of debt.

This raises several questions: How long will this last? What will happen in the markets and in portfolios when the cycle ends? And most importantly, how to manage for all of this? Our answer at TIAA’s General Account is broader and deeper diversification.

In our credit portfolios, we’re investing across a range of issuers, sectors and geographies across both public and private markets, relying on the in-depth research from the experienced teams at our investment managers. Real estate and other real assets also have a role as they can provide solid income generation, and in many cases inflation protection should inflation risks continue to increase.


Creating resilient portfolios

The unanswered, and maybe unanswerable, questions about the bond market reinforce the need for resiliency in portfolios — and allowing for the flexibility to achieve your return objectives within your risk appetite. The GA’s resiliency is built through a flexible framework of multi-tiered asset allocation processes and plans that provide protection from the many known and unknown risks we face.

We are in a unique position compared with many investors as the GA has a very long investment horizon. Our approach is to employ a multi-decade strategic asset allocation plan, an annual dynamic plan and a near-term tactical plan simultaneously.

The GA’s strategic asset allocation provides guardrails designed to help us deliver on our core promises to our participants today and in the future. Our annual dynamic asset allocation highlights investment areas of relative value and risks given the near-term state of the markets. While our shorter-term tactical asset allocation allows us to respond to quickly shifting market conditions as we move up or down the risk spectrum, investing in assets that offer appropriate compensation for taking on that risk.

Asset allocation plans that allow investors to achieve return objectives through different market conditions help create resilient portfolios. The challenge is sticking to them when conditions are volatile and difficult, and trading off short-term optimality for the benefits of achieving long-term investment objectives. Following these plans, however, will improve the chances of future success.

In usual cycles, most of credit excesses are cleaned out in a recession. But that didn’t happen in 2020.

-Nicholas Liolis



As part of his participation in Nuveen’s Global Investment Committee, Nick Liolis offers his perspective as an institutional investor and asset allocator. Neither Nick nor any other member of the TIAA General Account team are involved in portfolio management decisions for any third-party Nuveen strategies.

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