Gov Sovereigns/Treasurys
Government bond yields will remain at depressed levels as investors stay in safe haven assets given the lack of clarity on the next steps in the Brexit saga.
At the margin Brexit only serves to reinforce the divergences in global growth that were already in place. Maintain duration at benchmark and look to increase duration exposure on any meaningful back-up in Treasury yields. Corporate spreads are still not attractive, but any Brexit related sell-off could present an opportunity to initiate a tactical overweight.
The secular stagnation narrative is gaining traction amongst the FOMC. Expect further downward revisions to longer run FOMC interest rates forecasts, toward levels already discounted in the Treasury curve.
We prefer to fade the recent fall in yields by moving to neutral on U.K. Gilts and underweight Australia, while maintaining a benchmark overall stance on portfolio duration.
The Fed has reason to delay the next rate hike until at least September, even if volatility subsides after the June 23 Brexit vote.
Three strategies that could win whatever the outcome of Britain's referendum on EU membership. And what to look out for in the final days before the vote.
At current levels, Treasury yields are consistent with our assessment of fair value. Further, the Fed's Labor Market Conditions Index does not suggest an imminent recession. Expect payrolls to stabilize above levels consistent with further progress on wage growth and inflation, allowing the Fed to hike rates later this year.
For now, maintain a benchmark duration stance leading into the June 23 U.K. Brexit vote, favoring Treasuries and (especially) Gilts over Bunds and JGBs.
Risk assets will take their cues more from the dollar than the Fed if the euro rises above its 16-month range against the dollar. Retain exposure to energy equities and gold.
The RMB has been steadily depreciating versus the U.S. dollar and has dropped to a new cyclical low versus its trade-weighted basket. All the while, Chinese domestic interest rates have lately drifted higher. When global investors wake up to these dynamics, global share prices and EM risk assets will likely sell off anew. In Mexico, initiate a new yield curve trade: receive 10-year / pay 1-year swap rates.