The Weekly Strategy Report (11 January 2016)Contributor Multi-Asset Solutions
- We review US fixed income performance in 2015 and refresh our views on duration.
- Strong domestic US growth, firming core inflation and an active Federal Reserve (Fed) support a gradual move higher for 10-year US Treasury (UST) yields. However, heightened uncertainty about external growth, downside risks to commodity prices, and unsynchronised monetary policy cycles sustain a bid for duration. Moreover, stock-bond correlations are negative, adding diversification benefits to holding duration within a multi-asset portfolio. We expect these countervailing forces to balance out and so remain neutral on duration.
- Uncertainty over the near-term global growth outlook and increased volatility stemming from China favors an expression of relative views rather than outright directional views. In our multi-asset portfolios, we prefer developed over emerging market equities, and we are overweight high yield (HY) credit across the US and Europe vs. emerging market debt, and overweight Australian vs Canadian bonds.
Exhibit 1: Change in U.S. 10Y yield in 2015: Decomposition into real and breakeven components
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