Fixed Income
Investors overestimate the threat current interest rate levels pose to both equities and the economy. Despite a rising long end, the gap between high-yield borrowing costs and both nominal growth and corporate profits is at five-year lows and falling. Remain overweight equities. Within Fixed Income, Upgrade High Yield and Downgrade Government Bonds and EM Debt. Downgrade Chinese Equities to Neutral.
MacroQuant recommends a slight underweight position in equities, counterbalanced by a slight overweight to bonds, and a significant overweight to cash. The model is positive on the US dollar, modestly negative on gold, and bullish on copper and oil.
The PCE/CPI gap is an increasingly important factor driving the near-term outlook for Fed policy. We discuss the drivers of that gap and conclude that it’s likely to narrow in the coming months.
The US Treasury department’s attempts at yield suppression are doomed to fail unless the Federal Reserve gets involved.
Despite recent increases, long-maturity Treasury yields are roughly consistent with fundamental fair value. We see limited value in long duration plays.
