Gov Sovereigns/Treasurys
The Fed hiked 25 basis points at yesterday’s FOMC meeting while also signaling that the tightening cycle is now on hold. We discuss the short-run and long-run implications for Treasury yields.
This week we present our Portfolio Allocation Summary for May 2023.
In Section I, we discuss why the rally in stock prices over the past month reflects the soft-landing view, and why that is not a likely economic outcome. US inflation is slowing, but target inflation remains elusive. Meanwhile, cracks in the US labor market are already apparent, and there is strong evidence against the view that US stocks are appropriately priced for an eventual US recession. This underscores that conservative investment positioning is still warranted. In Section II, we check in on the indebtedness risk of several major economies, and examine whether these risks exist primarily in the household, nonfinancial corporate, or government sectors. While there are limited cyclical implications of recent trends in global indebtedness, there are several problems that will eventually “come home to roost” – particularly in the US and China.
Government financing vehicles (LGFVs) are a key component of China’s credit system. LGFV bonds make up a 40% share of the onshore corporate bond market, and loans to LGFVs make up 20% of total loans. LGFV debt-servicing capacity is very weak. What are the ramifications of all of these for Chinese economic growth and financial markets?
This Special Report discusses why there is a non-negligible risk that the US Congress will not reach a timely agreement to lift the debt ceiling this summer. It also discusses what will happen in bond markets in the lead up to the debt limit and in the case where a deal is not reached in time.
The dollar has entered a structural bear market. Although the greenback could get a temporary reprieve during the next recession, investors should position for a weaker dollar over the long haul.
This report looks at the relationship between rate risk and credit risk and how it has changed over time. It also makes the case for favoring agency MBS within an underweight allocation to US spread product.
In this Special Report, we evaluate future prospects for the Australian dollar and Australian government bonds. The currency remains fundamentally cheap, and positioning is very short, but the AUD will continue to underperform in the near-term due to sluggish global growth. Australian government bonds have had a nice run of outperformance over the past year, but it is now time to take profits with given the uncertainty that the RBA will deliver the rate cuts currently discounted.
A benign disinflation is probable during the remainder of 2023. Unfortunately, just when most people become convinced that a recession has been avoided, a recession will begin.
Today’s releases of the March CPI and March FOMC minutes do not change our view that the Fed will deliver one more 25 basis point rate increase before going on hold.