In recent weeks, the average yield on global government bonds within the Bloomberg Global Aggregate Bond Index has surpassed 4%, reaching its highest level since 2000. From a valuation perspective, investors might consider allocating more funds to fixed-income assets. This rationale seems even more compelling as the earnings yield of S&P 500 stocks—the inverse of the price-to-earnings ratio—has fallen to its lowest level relative to sovereign bonds in over 20 years. In other words, the earnings yield advantage offered by U.S. equities compared to government bonds has significantly narrowed. Shorter-duration government bonds appear particularly inexpensive. We believe the current yields on such bonds reflect market expectations that the Federal Reserve will raise interest rates more times in the future than it ultimately will. This is because we anticipate inflationary pressures will eventually ease. However, even so, we do not agree with the view that government bond allocations should currently be increased to an overweight position. While we believe the Fed's future rate hikes may not be as aggressive as the market currently expects, there are other risks beyond inflation that could continue to cause volatility in the government bond market. First, public sector fiscal deficits remain elevated, which continues to exert upward pressure on government financing costs. At the same time, economic growth in the U.S. and other regions around the world continues to exceed broad market expectations. Furthermore, the Federal Reserve's interest rate decision-making framework may also change. The new Federal Reserve Chair, Kevin Warsh, has pledged to reassess the Fed's policy framework, including how the institution measures inflation and how it should prevent inflation from overshooting in the future. Any changes in policy stance could once again trigger a significant rise in bond yields. For these reasons, we are inclined to maintain a neutral allocation to developed market government bonds. (The above views are from Pictet Asset Management as of October 5 and are for reference only, not constituting investment advice.)