Global Fixed Income Views 2Q19Contributor Robert Michele
Themes and implications from the Global Fixed Income, Currency & Commodities Investment Quarterly meeting
- We lowered slightly our base-case scenario, Above Trend Growth, from a 50% probability to 45% and slightly raised the probability of Sub Trend Growth from 35% to 40%. A soft landing, with growth roughly at trend, appears likely for the global economy.
- U.S.-China trade negotiations still top our list of concerns; if the trade battle escalates, the impact on business spending and consumer sentiment will be globally significant.
- We don’t see recession in 2019 or early 2020—we believe the Federal Reserve (Fed) unambiguously ending three years of tightening, and other central banks’ dovish tilts, have extended the cycle. We left the probability of Recession unchanged at 10%, although even a minor policy error could raise that.
- We are encouraged to fully embrace the bond market again and want to be buyers of every backup in yields or widening in credit spreads. Among our top picks: external and local emerging market (EM) debt and currency, BBB corporates, high yield credit and loans, and short-term securitized credit.
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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