Ahead of the Curve
Market Pulse: Monthly Bond Market Analysis
Our economists and portfolio managers interrogate signals from markets and fast-moving policy drivers to develop a comprehensive macro view of fixed income markets, while our research and analytics teams assess sectors, currencies and interest-rate trends for optimal yield-curve positioning. It all comes together in our monthly Market Pulse.
- Improving Global Growth Supports the Expectation for Higher Treasury Yields
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January was characterized by improving global economic data and mixed, modest movements across most major fixed income sectors. Ultimately, the outlook for economic growth in the U.S. and Europe was upgraded, further strengthening the case for potentially higher Treasury yields in the coming months. In the Sector Strategy meeting, participants discussed the recent underperformance in certain credit segments driven by developments in artificial intelligence (AI) and emphasized that individual fundamentals remain more impactful for longer-term industry outcomes.
Analysis and Conviction Updates
Global Economics
- Strong estimates of gross domestic product growth and improving optimism across surveyed measures in the U.S. along with rebounding manufacturing data out of Europe supported the decision of our U.S. and eurozone economists Blerina Uruci and Tomasz Wieladek to upgrade their respective growth outlooks. Globally, inflation remains contained and major labor markets are showing signs of stabilization. As a result, the economics team expects policymakers at the Federal Reserve and the European Central Bank to remain patient over the coming months.
Global Interest Rates and Currency Strategy (GIRCS)
- With stronger conviction that growth in the U.S. may remain strong in the coming months, our GIRCS committee maintained its belief that U.S. Treasury yields longer than two years in maturity are more likely to rise than not. In conjunction with the belief that inflation risks remain skewed upwards in the U.S., a steeper U.S. Treasury curve appears to be the path of least resistance if strong growth adds upward pressure on longer-term maturities while sticky inflation may keep the front end more anchored. Meanwhile, the GIRCS committee highlighted potential headwinds for the U.S. dollar amid increased expectations for stronger growth outside of the U.S. and demand concerns.
Sector Strategy
- Our Sector Strategy meeting featured a wide-ranging discussion regarding the recent AI-related underperformance of segments of credit with ties to the broader software industry. In particular, discussion focused on industries where developments in the AI arms race could have an outsized future impact on performance including media, health care, and financial services. Ultimately, participants coalesced around the belief that while sentiment may drive short-term performance across entire industries, long-term results will continue to be driven by the fundamentals of each underlying issuer.
Bottom Line: As the timeline for technological disruption moves ever faster, the importance of having independent, research-backed views on individual firms and the securities they issue only becomes more important. With hands-on resources across the investment universe, our investors are best positioned to deal with market developments as they arise, new or old.
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