Head of Global Macro and Portfolio Manager
• Quarterly outlook
Fixed income outlook: Fearless
With optimism about an easing of US financial conditions, markets are increasingly fueling a fearless rally in risk assets – seemingly ignoring lingering perils.
Authors
Strategist
Strategist
Summary
- Fearless risk markets believe a new phase in the reflation cycle is coming
- Preference for targeted curve steepeners and SSAs and selective EM ahead of credit
- In EGBs, France has rightly traded places with Italy
Even as we believe the Fed will continue to cut rates well into next year, we are mindful that valuations of risk assets look stretched. Indeed, with credit spreads at tight levels, the margin for error remains narrow, underscoring the case for conservative beta positioning.
In our previous outlook, we asserted that a deterioration in employment data would push the Fed into rate cuts in September. As hiring has slowed the Fed acted pre-emptively, even as upside inflation risks from tariff-related cost pass-throughs and political pressure fuel concerns about its independence.
Looking ahead, tariff and labor shocks remain downside risks to the US growth outlook. On a more positive note, the AI boom, upcoming tax cuts and the strong equity market sentiment continue to support US economic growth. As a result, a recession remains a non-modal outcome in our view.
Outside the US, Europe and Japan have done better than expected. Southern Europe is holding up well, and growth in Germany should pick up thanks to more spending on defense and infrastructure. Hence ECB policy is no longer restrictive and we expect the ECB to pause, for now.
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