FICC

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.

Absolute valuations on Euro Area corporates are not cheap, but there are relative value opportunities to take advantage of the ECB becoming a major buyer of corporates. Favor Euro Area High-Yield over Euro Area Investment Grade, and favor Euro Area corporates over U.S. corporates.

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.

The balance of risks favors accelerating wages and stable core inflation during the next few months. This will result in a move higher in rate hike expectations, benefitting Treasury curve flatteners.

Japanese policymakers are in the process of shifting away from negative rates and fiscal consolidation, leaving JGB yields exposed to any move to weaken the yen that could raise depressed inflation expectations.

Treasuries appear overbought in the near-term, especially given evidence of a rebound in global manufacturing, but we would need to see evidence of a sustained re-synchronization of global growth before advocating a shift to below benchmark duration on a 6-12 month horizon.

Special Report

In this Special Report, we discuss the state of the New Zealand business cycle and propose some trade ideas to capitalize on the excessive pessimism currently at play in New Zealand bond and currency markets.

Some tentative signs of life in the global manufacturing data suggest that Treasury yields have some room to move higher in the near term.

We continue to recommend a cautious investment stance, staying at benchmark duration, as the recovery in risk assets looks more like a counter-trend rally than the start of a new bullish run.