FICC
| Bonds
Bond market analysis on where to position across government bonds, credit, and inflation-linked debt.
With recent comments strongly hinting that the Fed is on track for a rate hike in December, the dy-namics of the Fed Policy Loop make spread product appear extremely vulnerable.
Given the rising odds of another Fed move before year-end, and the uncertainty that additional easing can be delivered in Europe and Japan, we re-iterate our tactical call to maintain a below-benchmark duration stance.
We put the odds of a Fed rate hike this year at slightly better than 50/50. But in the event of a rate hike, any sell-off in risk assets will be relatively short-lived and not as severe as the sell-off that followed the initial rate increase last December.
The tailwind of better-than-expected global growth and highly supportive monetary policy has the potential to push global spread product into overshoot territory.
The combination of strengthening global growth and more accommodative monetary policy means that spread product can continue to outperform in the coming months. Despite lingering concerns about credit quality in the corporate sector, we recommend moderately increasing exposure to high-quality spread product.
Eventually the easing of financial conditions will strengthen the Fed's resolve to lift rates. Rate hike probabilities will rise and risk assets will struggle to cope with higher Treasury yields.
Government bond markets have likely overestimated the degree of policy dovishness that is likely to be delivered by the major central banks in the next few months.
This week, we are sending a Special Report written by BCA's Chief Global Strategist Peter Berezin, discussing the end of the 35-year global bond bull market. In addition, we are also sending you a joint U.S. Bond Strategy/Global Fixed Income Strategy Weekly Report which discusses the end of the secular bond bull market and the implications for global bond strategy.
