More Dominos To Fall – April 3, 2023

A just-published report updated our fixed income recommendations and strategy. The report concluded that investors will have to get used to elevated bond market volatility, as fixed-income markets are likely to continue facing macro crosscurrents. The reason is that the global economic expansion has matured but is not over, yet rising bond yields keep snapping weak links.

Focusing on these crosscurrents will prove critical for timing the next global recession and a cyclical downturn in G7 government bond yields. If central banks are truly determined to return consumer price inflation to near 2%, they will snap many of the new weak links that were inflated during the free money era. It will be crucial to monitor spillover contagion to time the next recession.

In sum, the cycle is maturing, but bond volatility will remain elevated until recessionary forces finally take hold, and another blowoff in yields should not be ruled out. For now, we recommend focusing government bond exposure in weak link DM economies and EM local-currency debt.


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