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Bonds

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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IMPLICATIONS FOR INVESTORS

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.

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