Global bond markets have been supported by a number of factors in recent months, each of which is likely to have largely run its course. In the case of the U.S., the prospect of new dovish members at the Fed further reinforces that policy will be easy, but the forward markets are already discounting several rate hikes by yearend. U.S. inflation expectations have declined to their lowest level in nearly three years, even though measured core inflation has been fairly stable. However, consistently negative economic surprises have caused bond sentiment to become extremely optimistic.
Our multi-asset investment strategy and positioning is still slightly pro-growth, even though our overall equity weighting is only neutral. Our mildly positive economic bias is evident in our fixed-income positioning: we prefer cash, and continue to underweight fixed income in a global multi-asset portfolio (and a mildly lower-than-benchmark duration), while overweighting credit within a fixed-income portfolio. Although near-run momentum is positive for bonds, a lot of good (for bonds) news is already discounted and valuation for government bonds is abysmal in anything but a recession scenario. Credit will hold up barring a slide into recession and outperform government bonds, but absolute returns will be slim.