Global Fixed Income Views 4Q 2017Contributor Robert Michele
Themes and implications from the Global Fixed Income, Currency & Commodities Investment Quarterly meeting
- Above Trend Growth remains our base case, with global growth at its strongest since the recovery and cyclical inflation potentially poised to move higher. As continued aggregate central bank balance sheet expansion keeps risk-free rates range-bound and risk-asset spreads tight for the near term (notwithstanding the Federal Reserve’s anticipated taper), don’t fight the Feds.
- We anticipate only a gentle rise in rates. In the near term, we expect the Federal Reserve (Fed) to raise rates in December, supported by higher growth and inflation. We expect only a modest rise in 10-year U.S. Treasury yields, to between 2.25% and 2.75% by year-end.
- With real rates compressed and asset classes fully priced, we seek relative value. We believe in prudently adding carry, until leading indicators tell us inflation is rising much faster or growth is slowing.
- We still like U.S. high yield and are bullish on Europe, particularly European bank capital (Additional Tier 1). Emerging market local currency bonds remain a favorite, funded with a basket of low-yielding developed market currencies.
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.
1 The Phillips curve illustrates the inverse relationship between unemployment and inflation.
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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