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Trimming EM bond exposure

• We view bonds as a core holding, as the recent market volatility and geopolitical uncertainty reinforce their value as a hedge and an important source of income. Elevated trade uncertainty is likely to weigh on growth expectations, keeping yields capped. We lower our US 10- year Treasury yield expectation to the 2.25-2.50% range over the next 12 months, acknowledging the risk that yields could move higher should the global growth trajectory turn upwards.

• Emerging Market (EM) USD government bonds and Asian USD bonds still rank highest in our preference order within bonds, with around a 65% probability of outperforming global bonds, but we prefer to trim our exposure slightly and lock in some profits. Our base case of extended escalation of trade tensions implies a high likelihood of higher yield premiums for EM bonds in the short term.

• Increased growth and geopolitical risks lead to modestly higher exposure to high quality Developed Market (DM) Investment Grade (IG) government and corporate bonds as a hedge against market volatility.

• Given the low differential between short-term (2-year) and long-term (10-year) US bond yields, we continue to favour a maturity profile centred around 5-7 years. We also prefer to hedge currency risk for DM IG bonds in order to reduce the overall volatility of bonds allocation.

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Emerging Market USD government and Asian USD bonds remain top ranked, but conviction has reduced modestly

Increase allocation to high quality Developed Market Investment Grade government and corporate bonds

Maintain a 5-7 year average maturity profile for USD- denominated bonds.

img 3368 - Bonds