High-Yield

The Fed is sending signals that another rate hike is coming, despite sluggish U.S. growth and modest inflation, while both the ECB and BoJ are facing questions about the ability to maintain the pace of bond purchase programs. Amidst all this uncertainty, bond risk premiums can rise further in the near term.

The Treasury curve will bear-flatten between now and a likely December rate hike. Beyond December, our strategy will depend on how the dollar responds to increased rate hike expectations. For now, maintain below benchmark duration and favor convexity risk over credit risk.

With recent comments strongly hinting that the Fed is on track for a rate hike in December, the dy-namics of the Fed Policy Loop make spread product appear extremely vulnerable.

The global search for yield, not an improvement in EM fundamentals, has been driving the EM rally. EM/China growth conditions have stabilized but not recovered. Barring a full-fledged cyclical profit upsurge in EM EPS, EM stocks are not cheap at all. EM/China final demand for commodities will disappoint and will likely produce a major reversal in EM risk assets.

The combination of strengthening global growth and more accommodative monetary policy means that spread product can continue to outperform in the coming months. Despite lingering concerns about credit quality in the corporate sector, we recommend moderately increasing exposure to high-quality spread product.

Eventually the easing of financial conditions will strengthen the Fed's resolve to lift rates. Rate hike probabilities will rise and risk assets will struggle to cope with higher Treasury yields.

The 35-year bond bull market is coming to an end and the downward sloping trend channel for yields is changing to flat. Asset allocators should trim duration and fixed income exposure.

The 35-year bond bull market is coming to an end and the downward sloping trend channel for yields is changing to flat. Asset allocators should trim duration and fixed income exposure.

There has not been much of an improvement/recovery in the Chinese economy. Credit growth is weakening anew, which warrants a downbeat cyclical outlook for China's industrial sectors. Malaysia is heading into a classic credit/banking downturn. Go short Malaysian banks stocks and short the ringgit versus the U.S. dollar. In South Africa, take profits on the yield curve flattening trade. Continue shorting the rand versus the U.S. dollar.

Developed Market bond yields are too low relative to improving global growth and the strong recovery in risk assets post-Brexit. Reduce portfolio duration to below-benchmark.