Macro Monitor

“Lower Risk” signal closed out the “Higher Risk” signal generated five months ago. We’re encouraged by the resilience in risky assets during the oil sell-off and the late surge in global bond yields. We’ve been favorable toward high-grade credit and maintain this view within the fixed income space.

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The best interpretation of the current cross-asset message is the scenario of goldilocks, and there are reasons to believe this is a possible scenario for the near term.

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The global risk rally is broad-based enough to justify a favorable credit view and we still believe higher quality credit offers better reward/risk.

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Higher quality Corporate bonds are big beneficiaries of the goldilocks environment.

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The dominant theme in the last few weeks has been the notable weakness in macro-economic data.

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Last month, we recommended going up in quality within fixed income and we maintain this cautious stance for the time being.

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Despite the recent soft patch of data, the economic backdrop remains solid.

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The tapering of QE, clearly a tightening move, complicates the definition of the current tightening cycle.

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We recommend going up in quality across the whole fixed income spectrum.

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We recommend going up in quality across the whole fixed income spectrum.

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Given the high likelihood of a March rate hike, we can’t help but wonder if the old adage of “three steps and a stumble” really holds.

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While we continue to view spread products favorably within fixed income, the March rate hike has yet to have its impact play out. In the near term, we will respect the “higher risk” signal and exercise caution.

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Higher quality Corporate bonds should be able to weather the rate hike quite well.

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The market seemed hesitant to push the Trump trade any farther as new policies have focused on trade renegotiation and immigration, the less positive part of the policy package.

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This new signal is mostly due to a much lower reading three months ago.

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After the big supply last month, we believe there is more room for spreads to narrow.

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There are certainly better catalysts this time that make a bear market a distinct possibility, but until a decisive break occurs (most likely when the 10-year gets above 3%), the bull market is still intact.

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In 2016, both the U.S. and the U.K. stock markets tracked their historical patterns quite well but other international equity markets and non-equity markets tracked poorly.

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While we are aware of how far markets have moved in the few short weeks since the election, we continue to maintain a Favorable view toward spread products within fixed income.

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Both the macro backdrop and price trend still point to narrower spreads ahead.

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