Inflation Protected
There is a risk that global bond yields move higher in the near term, although we prefer to position for that move <i>via</i> cross-market spread, yield curve and inflation trades.
The U.S. dollar has fallen to almost 5% below its 2016 peak. In this <i>Special Report</i> we explore the impact of a weaker dollar on key U.S. fixed income markets.
To cheaply hedge against a "Leave" vote, go long U.K. inflation protection, reduce exposure to U.K. corporate debt, and position for a steepening of the Gilt curve.
Financial conditions will continue to ease during the next few months, and the Fed will use its June statement to prepare the markets for a rate hike in September.
Most financial assets are trading within the confines of the feedback loop between markets and Fed policy. Investors should avoid expensive assets such as spread product, and hold positions with attractive long-term value such as U.S. TIPS over nominal Treasuries and U.S. Treasuries over German bunds.
Most financial assets are trading within the confines of the feedback loop between markets and Fed policy. Investors should avoid expensive assets such as spread product, and hold positions with attractive long-term value such as U.S. TIPS over nominal Treasuries and U.S. Treasuries over German bunds.
Some tentative signs of life in the global manufacturing data suggest that Treasury yields have some room to move higher in the near term.
Risk assets are stuck in a range driven by the Fed feedback loop. But the current rally may continue for another quarter or two.
While the post-GFC linkage between oil prices and medium-term inflation expectations evident in the 5-year/5-year (5y5y) CPI swaps market will continue to be debated for years to come, this is an empirical fact that will affect monetary policy and the evolution of FX and real interest rates over the medium term.
The inflation outlook priced into the market is overly bearish, and TIPS breakevens will move higher as the drag on inflation from food and energy prices dissipates.