High-Yield

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.

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.

Assuming last month's weak employment report is not the start of a trend, the market is still discounting too low a probability that the Fed will lift rates this year. This means the Treasury curve should bear-flatten in the coming months, providing an opportunity to move to above-benchmark duration.

Weak employment will push out the timing of rate hikes to something closer to BCA's view of a September increase. It is also supportive of our asset allocation call two weeks ago to overweight Treasuries.

Both hawks and doves at the Federal Reserve, including Chair Yellen, have stepped up efforts to condition financial markets for a rate hike as early as June.

A June rate hike is a real possibility, but the Fed still needs evidence that growth is rebounding toward 2% in order to follow through. Whether the next rate hike occurs in June or later this year, a persistent hawkish shift from the Fed will send Treasury yields higher during the next few months.

There is a considerable dichotomy between the EM equity universe and EM corporate credit markets. EM credit markets remain mispriced. EM currencies are at risk of renewed depreciation. This will push sovereign and corporate spreads, as well as high-yielding domestic bond yields, higher. Continue underweighting Indonesian stocks, sovereign credit and domestic bonds within their respective benchmarks.

Within an overweight allocation to Euro Area corporates versus U.S. corporates, favor single-B rated Euro Area High-Yield and Euro Area Investment Grade sectors that offer higher duration-adjusted spreads.

Preliminary results from the Philippine elections suggest that policy uncertainty and discontinuity will challenge the reform trajectory of a country with one of the best macroeconomic backdrops in the emerging market universe.

We continue to view the rally in equities and high-yield corporate bonds since February as a high-risk affair.