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Dovish Tone Marks the Return of Monetary Easing

Quarterly Outlook – Fixed Income



  • While investors are pricing in multiple interest rate cuts on both sides of the Atlantic, we believe market expectations have become too extreme.
  • Global economic growth data appears close to bottoming, and we should see improvement in the second half of 2019.
  • The growth backdrop will be critical for the performance of different classes.

Markets Pricing in Rate Cuts

The period of quantitative tightening has come to an end. Fixed income markets have now entered a new regime whereby major central banks are expected to ease monetary policy. This has triggered a significant rally in core government bonds with multiple rate cuts not only in the U.S. but also in the eurozone now priced in by markets. However, we believe that the markets’ pricing of monetary easing has potentially become too extreme and are sceptical over the ability of U.S. Treasuries and German bunds to continue rallying. This led us to reduce the portfolio’s duration during June.

A Bottoming in Growth Data

On the global growth front, we believe that data is close to bottoming and it’s possible we will see some improvement in the second half of 2019. Looser financial conditions should be supportive of growth, as should the reduction in uncertainty owing to China and the U.S. resuming trade talks. We believe this environment could be conducive for risk assets, particularly emerging markets, which continue to stand out in terms of improving fundamentals and attractive valuations. As a result, we have been adding to select high-carry opportunities in developing currencies in recent weeks.

On the bond side, we have added positions in local markets where inflation is well behaved and there’s potential for the central bank to cut interest rates in the future. To keep risk balanced in the portfolio, we have increased our short bias against credit markets because valuations look expensive after rallying strongly late in the quarter. In addition, the short credit position should help provide some protection should growth slow further.

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