Articles by Chun Wang Director of Multi-Asset Strategies
U.S. 10-Year: 245-250 Area A Strong Barrier
We expect the 245-250 area, the upper bound of the previous lower range, to be a strong barrier.
Can The EM Problem Spread To DM? Yes, If It Gets Bad Enough
The current EM weakness is not yet a full-blown crisis but, if it does become one, it will drag down developed economies too.
Inflation Pressure Anemic
Inflation measures are broadly in line with expectations, and overall inflation pressure is anemic. We maintain our view that inflation will be a non-factor in the first half of 2014, and it might increase moderately in the second half. Inflation on the producers’ level is weak, too and the PPI inflation pipeline doesn’t seem to pose any immediate inflationary threat either.
A Taper & Hibernating Bears
The rise in interest rates after the taper was on the back of low liquidity around the holidays. 3% is a pretty strong upper bound for the 10-year, and a failure to stay above this level will probably see a re- test of the 275 level in the near term.
2014 Time Cycle—Lower Your Expectations & Be Patient
It’s time to update our time cycle composites, and what they say for equities in the U.S., U.K., Germany and Japan and long-term interest rates and credit spreads in the U.S.
U.S. Bonds
The thin liquidity likely magnified the move in both rates and credit spreads, but we continue seeing a friendly macro environment that supports high quality credits.
Inflation - Still Missing
Inflation measures are going lower still, and the lack of inflation is one of the biggest hurdles for the Fed to start tapering. We maintain our view that inflation will be a non-factor for the next six months, but it will increase moderately in the following six months. We expect weakening inflation on the producers’ level too. Disinflation is consistent across various measures.
US Bond Grades
The renewed participation of credits in the risk asset rally is a welcome sign.
Risk Aversion Index Edges Lower, Stays On Its “Lower Risk” Signal
We are in the seasonally favorable part of the year and we continue favoring high-grade credits within fixed income.
10-Year: No December Taper, Back To The 250 Level
Given our assumption of no December taper and the fact that most of the recent rise in interest rates is due to an early-taper fear, we expect the 10-year yield to drop back to the 250 level.
The Dual Mandate Presents A Clear Dilemma For The Fed
The “dual mandate,” which means the Fed is paying close attention to both inflation and employment, presents a clear dilemma for the Fed when it comes time to decide on a taper.
Inflation Lower Still
We maintain our view that inflation will be a non-factor for the next six months but will increase moderately in the following six months.
US Bond Market - October 2013
We are encouraged by the narrower spreads in October as the feared divergence between credits and equity markets did not continue.
Risk Aversion Index Falls Further, Stays On Its “Lower Risk” Signal
We seem to be in a “Goldilocks” period, where economic numbers are not bad enough to re-ignite recession fears but are just weak enough to push the taper farther off.
Five Reasons Inflation Is Still Missing
Overall demand slack, stubbornly low velocity of money, an overall stronger dollar, painfully low labor cost inflation and weakness in commodity prices are strong disinflationary forces.
10-Year: Year-End Target Still 250 BPS, Interim Volatility Expected
We don’t think the numbers between now and the Fed’s December meeting will be strong enough to convince it to start tapering this year. No taper until 2014, in our opinion.
Inflation - Tilting Lower
Inflation measures are tilting lower. The Fed does not see the low inflation reading reverting to a more normal level any time soon. We maintain our view that inflation will be a non-factor for the next six months but will increase moderately in the following six months. Inflation on the producers’ level weakened too. We don’t anticipate a big rise in the near term.
Our Position on U.S. Bonds
U.S. Investment Grade Corporate Bonds: Favorable, U.S. High Yield Corporate Bonds: Neutral, U.S. Municipal Bonds: Neutral
Risk Aversion Index Falls To New “Lower Risk” Signal
The RAI had the biggest drop of the year in September and triggered a new “Lower Risk” signal. This is largely due to the no-taper decision by the Fed. We remain cautious in the near term due to the debt ceil- ing debate but recommend increasing risky exposure after the debt ceiling resolution.
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