Global Fixed Income Views 1Q 2018Contributor Robert Michele
Themes and implications from the Global Fixed Income, Currency & Commodities Investment Quarterly meeting
- We have raised the probability that markets will continue to price in Above Trend Growth from 65% to 70%, and we have reduced the near-term probability of recession to zero (from 5%), recognizing that the flattening yield curve has been a function of low inflation and continued global quantitative easing, not imminent recession.
- For now, our view is consistent with the Federal Reserve’s (Fed’s) projections—strong growth, contained inflation and a gradual path towards normalized real yields, with the Fed raising the fed funds rate three times in 2018. However, if inflation starts coming in above target, we can see four rate hikes. We expect a modest rise in the U.S. 10-year Treasury yield, to end 2018 at 2.75%–3.25%.
- For the next three to six months, our best ideas continue to be in credit, particularly sectors that offer the attributes we would want should rates start to rise: significant spread, room for tightening and good cash flow.
- We like European bank capital (Additional Tier 1), U.S. high yield and securitized credit. Cognizant of the risk of higher rates, we are managing duration risk by shorting government bonds.
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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