Global Fixed Income Views 4Q 2018Contributor Robert Michele
Themes and implications from the Global Fixed Income, Currency & Commodities Investment Quarterly meeting
- We have reduced our base-case scenario, Above Trend Growth, to a 70% probability in response to escalating tariff battles and the potentially negative impact on trade; otherwise, the global economy is in very good shape.
- The Federal Reserve (Fed), seeing 3-4% GDP growth and low unemployment, can continue marching toward normalization, suggesting a 3% fed funds rate and further balance sheet rundown.
- We consider the stronger dollar unsustainable and expect it to correct as we enter 2019.
- We continue to like carry and credit. Favorite sectors include U.S. and European high yield and leveraged loans, as U.S. consumers enjoy the strongest balance sheets in decades; short-duration securitized credit; and emerging market debt, where potential trade wars and a strong dollar appear to be priced in.
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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