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Global Investment Views: Fixed Income - July 2018

Perspectives» |

July 1, 2018

Opportunities From Divergences

The latest FOMC release was hawkish, confirming the Fed’s current stance and its confidence in the strength of US growth. The Fed’s projection regarding future interest rates – also referred to as the “dots” – pulled forward its hikes by 25 bps, increasing from three rate hikes to four in 2018, maintaining three hikes in 2019, and moving from two to one hike in 2020. At the same time, the European Central Bank's press conference was dovish compared to market expectations. The European Central Bank introduced a commitment to leaving rates unchanged until summer 2019, thereby anchoring the expectations of low rates for an extended period of time. Nevertheless, the ECB decided to reduce its bond purchases, which should limit the appetite for european government bonds in the bond market. We will continue to play the Central Bank divergences through their reflections in yield curve dynamics and currencies. We see short-term forces supporting the USD vs the EUR, with a rebalancing towards the EUR through year-end. 

Developed Market Government Bonds

The European Central Bank has reinforced the anchoring of the short maturities and the directionality of the curve. Upside surprises on growth and/or inflation could impact the longer maturities and translate into a steeper curve. We continue to favor a short duration view in core bonds due to expensive valuations and the end of QE approaching. In the US, upside pressure on US Treasury bonds could continue, barring an escalation of the China-US trade dispute. By the end of 2018, the 10Y Treasury might return to between 3%  and 3.5%, assuming a 2.4% Fed funds target rate. The short duration view is confirmed, but is less pronounced than at the start of the year. Given the significant flattening in the yield curve, we believe investors may favour a more balanced underweight across the yield curve. 

Developed Market corporate bonds

Caution continues to be key given current market conditions and risks. On the other hand, in the Eurozone, European Central Bank corporate purchases will continue to support the market even after the end of QE. Fundamentals also remain strong (solid balance sheets). Investors should prefer high-beta shortdated bonds, in our view, which may provide a large carry and are less sensitive to rising interest rates. We are, we would note, more cautious on the highly subordinated and long-dated banking sector bonds. Selective opportunities should come from the primary market which now offers larger new issue premia. In the US, we believe investors should be selective, investing in IG, where we have witnessed most of the excesses of this credit cycle. Here, we prefer the more highly regulated financial sector (lower event risk, like M&A or share buybacks). We also favor the energy sector, particularly mid-stream companies (benefiting from strong US GDP and higher oil prices).

Emerging Market Bonds

Yields for Emerging Market debt have become more attractive and we expect investors to come back to the asset class in the last part of the year (with USD and US rates stabilising). In the short term, conditions are tough and we are cautious, especially for local currencies, as liquidity is fading. Geopolitics continue to be the dominant theme in Emergin Markets, with the escalating protectionist rhetoric between the US and China, and elections in Latam (Mexico, Brazil, Colombia among the main ones). In Turkey, the re-election of President Erdogan reduces political uncertainty but economic risks remain. Idiosyncratic stories (mainly due to weak current accounts) continue to weigh on the market.

Important Information


Unless otherwise stated, all information contained in this document is from Amundi Pioneer Asset Management (“Amundi Pioneer”) and is as of July 1, 2018.

The views expressed regarding market and economic trends are those of the authors and not necessarily Amundi Pioneer, and are subject to change at any time. These views should not be relied upon as investment advice, as securities recommendations, or as an indication of trading on behalf of any Amundi Pioneer product. There is no guarantee that market forecasts discussed will be realized or that these trends will continue. These views are subject to change at any time based on market and other conditions and there can be no assurances that countries, markets or sectors will perform as expected. Investments involve certain risks, including political and currency risks. Investment return and principal value may go down as well as up and could result in the loss of all capital invested.

This material does not constitute an offer to buy or a solicitation to sell any units of any investment fund or any service.


Date of First Use: July 1, 2018.

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Contributing Authors

Ken Taubes
Chief Investment Officer, US, Amundi Pioneer


Eric Brard
Head of Fixed Income, Amundi