Policy
Indonesia has been fighting the Impossible Trinity, a battle that cannot be won. The central bank will continue printing rupiahs and the currency will depreciate further. Eventually rupiah depreciation will push up interbank rates, and Indonesia's credit cycle and economic growth will stumble. Continue shorting the rupiah, underweighting Indonesian stocks and sovereign credit, and shorting long-term (5-year) local government bonds.
Greater safety for European taxpayers and bank depositors necessarily means more risk for bank equity and bond investors. We provide some detail, and also initiate two new short-term positions.
There is no sign that the Chinese economy has suddenly lost momentum. The credit and monetary cycle appears to be picking up. Meanwhile, our bottom-up analysis shows no evidence of a rapid buildup in leverage in China's corporate sector, as commonly perceived.
Value in the U.S. Treasury market is rapidly deteriorating, and the 10-year Treasury yield is now consistent with our fair value projections. Investors should shift from an above-benchmark to a benchmark duration stance.
Reduce portfolio duration to neutral, while also cutting exposure to European bonds (both in the core and Periphery) and Canadian government bonds.
Somewhat like 1998, the dilemma for the Fed is that the labor market is approaching full employment and may justify eventual interest rate hikes.
Central bankers fail to grasp that in a non-linear world, it can be futile and dangerous to set an over-precise target for inflation. Today, European banks are the victims of such misguided linear-thinking.
Despite its substantial decline, the 10-year Treasury yield still appears reasonably valued relative to our base case scenario of a flat or slightly weaker U.S. dollar. In this <i>Special Report</i> we outline our Treasury valuation framework, in which the dollar plays a key role.
With global bond yields converging toward the lower levels of the NIRP countries, it still makes sense to favor markets with higher nominal and real yields and steeper curves, like U.S. Treasuries (especially U.S. TIPS) and U.K. Gilts.