Views on Global Fixed Income

By Bob Michele via

Themes and implications from the Global Fixed Income, Currency & Commodities Investment Quarterly meeting

In brief

  • An environment of reasonable growth, low inflation and continued central bank accommodation should be supportive for risk assets in the near term.
  • Given the strength of synchronized global expansion, Above Trend Growth remains our base case scenario (with a probability of 65%, down from 70% in Q2). However, continued low inflation would support a Sub Trend Growth scenario (with a probability of 25%, up from 20%).
  • The biggest risks to this base case—a slowdown in China’s growth, an oil market collapse or an overly hawkish Federal Reserve (Fed) do not appear imminent. Both our Recession and our Crisis scenario probabilities are unchanged at 5%.
  • U.S. rate expectations have been muted, but a rebound in U.S. growth later this year should allow 10-year Treasury yields to rise to between 2.50% and 3.00% by year-end.
  • We see opportunity in European bank capital (Alternative Tier 1), leveraged loans, U.S. high yield bonds and emerging market (EM) local currency bonds.
  • We anticipate an extremely challenging investment environment over the next 12 to 18 months as the unwinding of quantitative easing (QE) takes the central banks’ aggregate balance sheet from expansion to contraction.

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