FICC | Bonds
Actionable asset allocation recommendations for your bond portfolio, drawing on macro analysis of interest rates and global debt market dynamics. Typically published weekly.
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US bond investment takeaways from this week’s PCE and employment releases.
We comment on Jay Powell’s Jackson Hole speech and recommend shifting to a barbelled allocation along the Treasury curve.
In this report, we assess the best opportunities in inflation-linked bonds in the major developed economies, based on trends in growth, inflation and the stance of monetary policies in each country. We conclude that the environment is turning more challenging for European inflation-linked bond performance versus nominal government bonds, while the opposite is true in Japan. In the US, US TIPS breakevens have likely peaked, particularly at the short end.
While the bearish bond trade currently has a lot of momentum, we continue to think that Treasury yields are close to a cyclical peak and will be lower on a 6-12 month horizon.
High-Yield municipal bonds have performed well in recent years, but valuations are now stretched. We recommend an underweight allocation, though we prefer high-yield munis over high-yield corporate bonds.
Some thoughts on this morning’s inflation number and implications for Treasury yields and TIPS.
Time is running out on the Bank of England’s tightening cycle. UK economic growth is flirting with recession, unemployment is rising, house prices are contracting and inflation is decelerating. Markets are overestimating the eventual bottom in UK inflation, and thus are also underestimating how much the Bank of England will eventually cut rates in the next easing cycle, which could begin as soon as H1/2024. The backdrop is turning increasingly positive for Gilts on a medium-term basis, while the overbought pound is due for a breather.
