Valuations

The recent bear-steepening of the US Treasury curve has been driven by the combination of stronger-than-expected economic growth and stable Fed rate expectations. Historically, such periods do not last very long, and we see the current bear-steepening episode ending soon. We also highlight an opportunity in Agency MBS.

The market has been held hostage by surging rates. Zombie companies are “alive” and are multiplying – they are highly sensitive to surging borrowing costs. Underweight Utilities to reduce portfolio duration. Maintain neutral positioning of Basic Materials but take a granular approach to allocations within the sector.

In this Strategy Outlook, we present the major investment themes and views we see playing out for the rest of 2023 and beyond.

Top-down measures of nonfinancial corporate sector balance sheet health have been flattered in recent quarters by inaccurate data on interest expense. After correcting for the inaccurate data, we see that our best measures of corporate balance sheet health show a persistent steady deterioration.

The implications of this morning’s CPI report for Fed policy, Treasuries and TIPS.

While Chinese stocks have low valuations and are oversold, their attractiveness is dampened by uncertainties in the magnitude of stimulus and the dismal outlook for corporate profits in the next six to nine months.