Macro Monitor

Our overall view toward credit has turned decidedly cautious over the last couple months and that includes our long-term favorite.

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While concerns about a trade war might be easing and the credit market has been largely unaffected by the surge in Libor rates, we have to recognize the fact that Trump’s policy focus has become increasingly market-unfriendly while global central banks are in a liquidity-reducing mode.

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The U.S. 10-year ended the month 15 bps higher but non-U.S. bonds fared much better with bond yields in Europe and Japan 4-5 bps lower.

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A potential trade war (not quite there yet) is not good for the dollar as it will inevitably invite retaliation and sour sentiment toward dollar assets.

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While the late rebound in risky assets pared back earlier losses, weakness was observed in all major risk asset classes. We continue to recommend defense for the time being.

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Higher volatility when credit spreads are already thin makes even the higher-quality issuers less immune to credit sell-offs. We tactically reduced these bonds to Neutral.

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With the dollar index breaking below the 2017 low, we believe the dollar bull market that started in 2011 (based on the trade-weighted dollar index) is most likely over.

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Our Risk Aversion Index turned higher last month but stayed on the “Lower Risk” signal as of the end of January. The first few days of February brought a big surge in this index and would suggest a “Higher Risk” stance for the near term.

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The net impact of the tax reform is significantly positive to investment grade companies as the interest deductibility change has very little impact.

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While we still believe flattening is the more likely scenario over the medium term, we do feel the recent flattening move is a bit overdone and there are several divergences that suggest a short-term steepening correction is in store.

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The most common 2018 time-cycle pattern among major markets is a fall correction, with the U.S. and Japan faring better than their European counterparts.

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Our Risk Aversion Index turned lower in December and reached an all-time low. We remain favorable toward higher quality credit within fixed income.

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The new tax bill will be another tailwind for these bonds as Corporate bond issuance is likely to be reduced going forward.

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The calm appearance of the 10-year yield masked a big curve-flattening move that has accelerated the last few months.

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The index ticked up on the back of higher VIX, a High Yield credit mini sell-off, and EM underperformance. We are turning a bit more cautious toward credit but still recommend safe spreads within fixed income.

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These bonds were quite stable during the credit sell-off in November and they remain good candidates for earning the carry.

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Our data shows the traditional Phillips Curve relationship between the unemployment rate and wage inflation still holds.

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The range-bound interest rate action provides a friendly environment to earn the carry, through moderate duration and high grade credit exposure.

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If the new tax plan gets passed, Corporate bond issuance will likely decrease while demand remains strong.

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The mini bond market sell-off in September was fueled by a string of positive developments, which should support the case for further upside in the Economic Surprise Index in the fourth quarter.

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