Themes and implications from the Global Fixed Income, Currency & Commodities Investment Quarterly meeting
After a historic quarter of global pandemic, economic shutdowns, ballooning government fiscal support and breathtaking central bank lending, Above Trend Growth has become our base case at 80% probability; we believe GDP bottomed in Q2.
We expect current policy responses to spark U.S. double-digit GDP growth in 2H20 and 3%–5% growth in 2021; we expect a robust bounce back in Europe and the emerging markets and for central banks to keep rates at their lower bound for years.
We cut the probability of Crisis from 15% to 10% and recession from 55% to 10%; any weakness should be met with additional policy response in an election year, however we forecast double-digit U.S. unemployment into 2021.
We are diversifying our up-in-quality bias and extending further out the credit spectrum, and rotating into certain sectors, including bank capital (additional tier 1 and preferred securities). We continue to like high quality securitized credit, and our interest is returning to emerging market local and external debt.
Scenario probabilities (%)
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The value of investments and the income from them can fall as well as rise and investors may not get back the full amount invested. Past performance is not a guide to the future.
Investments in bonds and other debt securities will change in value based on changes in interest rates. If rates rise, the value of these investments generally drops. Securities with greater interest rate sensitivity and longer maturities tend to produce higher yields, but are subject to greater fluctuations in value. Usually, the changes in the value of fixed income securities will not affect cash income generated, but may affect the value of your investment. Credit risk is the risk of loss of principal or loss of a financial reward stemming from a borrower’s failure to repay a loan or otherwise meet a contractual obligation. Credit risk arises whenever a borrower is expecting to use future cash flows to pay a current debt. Such default could result in losses to an investment in your portfolio.
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