Articles by Chun Wang Director of Multi-Asset Strategies
Inflation Still Going Nowhere In The U.S.
Inflation at both consumers’ and producers’ level is still modest. A drawn out government shutdown and debt ceiling debate will hurt the economy, which could further push out the taper timeline.
Debt Ceiling—Weakness Before But Strength After Resolution
A look at prior debt ceiling debates and patterns around resolution dates gives no surprises: markets are weaker in the two weeks before but stronger in the month after a resolution is reached.
No Taper—More Downside Likely On The 10-Year & Higher Volatility Ahead
A look at prior debt ceiling debates and patterns around resolution dates gives no surprises: markets are weaker in the two weeks before but stronger in the month after a resolution is reached.
Inflation - Still Going Nowhere
Inflation measures are anemic and mostly lower than expectations. 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 to be modest too. We don’t see strong evidence for a big rise in the near term.
U.S. Municipal Bonds: Maintain Neutral
Their relative cheapness, combined with the prospect of higher tax rates, certainly makes Munis more attractive now. But we’ll wait for interest rate volatility and outflows to subside before turning bullish on Munis.
U.S. High Yield Corporate Bonds: Maintain Neutral
On the positive side, the fundamental picture is still healthy for most U.S. high yield issuers, and defaults are expected to be low. On the negative side, weakening inflation expectations is a divergence that bears close monitoring. We will exercise patience and wait for a better entry point.
U.S. Investment Grade Corporate Bonds: Maintain Favorable
This is consistent with our overall cautious view on credits. Credit spreads continued narrowing despite higher volatility in the bond markets.
RAI Falls, But Stays On “Higher Risk” Signal—Remain Cautious
The RAI fell in August and stayed on a “High Risk” signal. We remain cautious and recommend higher quality within fixed income.
Data Dependency—September Taper Still Likely
More upside surprises are still likely and, despite the disappointing jobs report, the overall economic picture still supports a September taper. The improving economic picture is not just happening within the U.S., but in other major countries. We still believe the upside for the U.S. 10-year is limited.
Duration: It’s Not Just For Bonds Anymore
We measure the sensitivity of common stocks to changes in interest rates using Implied Equity Duration. Growth-oriented sectors tend to have higher duration than Value-oriented sectors, while regional differences are largely explained by interest rate and risk premium differentials.
U.S. Municipal Bonds: Maintain Neutral
The relative cheapness combined with the prospect of higher tax rates certainly makes us much more interested in Munis now. But we’ll exercise patience, waiting for the negative headlines to fade and interest rate volatility to subside before turning bullish on Munis.
U.S. High Yield Corporate Bonds: Maintain Neutral
Over the past few months we’ve seen the largest high yield bond fund outflow since 2000. We will exercise patience for now and wait for a better entry point.
U.S. Investment Grade Corporate Bonds: Maintain Favorable
Despite the exodus from all bond classes in the last few months, longer term demand for safe spreads is likely to remain strong and investment grade issuance has dropped significantly.
RAI Fell, But Stayed On “Higher Risk” Signal—Remain Cautious
The RAI fell in July and stayed on a “High Risk” signal. We remain cautious and recommend higher quality within fixed income.
The Dollar: Upside Limited In The Near Term
A closer look at the dollar’s two main counterparts, the euro and the yen, reveals a regime shift in both cases, but for different reasons.
10-Year: Taper the Taper—Upside Limited
If interest rates keep going higher from here, we would run the risk of derailing a still-fragile recovery. As long as the Fed tapering uncertainty exists, we expect higher volatility on the 10-year yield to persist in the mean time.
U.S. High Yield Corporate Bonds: Maintain Neutral
Although the fundamental picture remains healthy for most U.S. High Yield issuers and defaults are expected to be low, the reversal of a crowded trade could lead to further substantial losses on these bonds.
U.S. Municipal Bonds: Maintain Neutral
We believe the sell-off in Munis is overdone in the short-term and these bonds look attractive relative to Treasuries. But in the medium-term the tapering risk will linger; this is a big negative for long maturity credits like Munis.
U.S. Investment Grade Corporate Bonds: Maintain Favorable
The longer term demand for safe spreads is likely to remain strong once yields normalize and volatility recedes.
RAI Rises Again, Stays On “Higher Risk” Signal—Remain Cautious
The RAI rose again in June and stays on a “High Risk” signal. June saw an acute case of carry trade reversal; we remain cautious and recommend higher quality within fixed income.
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