1. Slowing U.S. data and risks abroad, particularly trade, give the Fed the green light to cut rates. The market has priced in this expectation, with 4 cuts expected in the next 12 months.
2. The demand for U.S. fixed income is supported by the lack of high-quality yield globally.
3. Central bank support and fixed income demand should result in stable credit spreads and positive yield carry. Given that spreads are at historic low levels and we’re in the late stage of the business cycle, our strategy is to earn yield carry rather than position for a major spread compression.
4. Both declining rates and tighter credit spreads have made yield more difficult to find. While the MBS sector has absorbed the brunt of the rally in rates, it still looks attractive from a carry perspective.
5. Within non-core fixed income, preferred stocks and high yield have the best yield-to-volatility ratio, or risk/reward profile, in our view.
For Sage’s Equities Outlook in 5 Charts, click here.
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