Yield Curve

US bond investors should increase portfolio duration from “at benchmark” to “above benchmark” on a cyclical (6-12 month) investment horizon. We also recommend exiting Treasury curve flatteners and closing short positions in the February 2024 fed funds futures contract.

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.

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.

In this report, we present our performance review of the BCA Research Global Fixed Income Strategy (GFIS) model bond portfolio for the Q1/2023, and the outlook and scenario analysis for the next six months. The portfolio slightly underperformed its benchmark during the quarter as global growth showed surprising resilience to begin the year. Looking ahead, the portfolio is positioned to capitalize on an expected slowing of global growth over the rest of the year through an overweight stance on government bonds versus spread product.

Bullish equity sentiment may persist in the second quarter on the Fed’s pause, but tight monetary policy, financial instability, elevated recession odds, extreme US polarization and policy uncertainty, and still-high geopolitical risk should encourage investors to maintain a defensive position for the coming 12 months.

This week we present our Portfolio Allocation Summary for April 2023.

High rates have hurt real estate and, now, banks. The next shoes to drop: Loan growth, profits, and employment. Stay defensive. Recession is probable, but risk assets have not priced it in.

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

It is too early to know whether the drop in bond yields will offset the drag on growth from tighter lending standards. But if it does, the net effect on equity valuations could be positive. This is enough to justify a modest tactical overweight to equities, with the proviso that investors should look to reduce equity exposure later this year in advance of a mild recession in 2024.