FIXED INCOME MONTHLY

On Comet, on Cupid, on Donner and Steepen!

Dec 21, 2016 / By Jeffrey Rosenberg

Fixed income highlights

  • Our holiday-themed title highlights global yield curves steepening. After the FOMC, however, the U.S. appears to unwind its steepening trend as the market digests a faster-than-anticipated pace of Federal Reserve hikes for 2017. Globally, though, European and Japanese curves steepened, reflecting changes in their respective monetary policies.
  • Reflation: the broader significance of yield curve steepening. The broader implications of steepening yield curves globally go way beyond the narrow technicalities of the altered scope of ECB or BoJ quantitative easing. Rather, they represent one of our earlier, pre-election core themes: the limits to monetary policy and the shift towards fiscal policy. The election fueled these trends—and in market prices, dramatically so.
  • There will be blood, reviewed. Our annual review of 2016’s My favorite themes and fixed income performance. Though rates appear to end up close to where our year-ahead outlook scenarios forecasted, they followed an unanticipated path.

Strategy and outlook

Anticipating the impact on the investment recommendations from some of those outlook themes for 2017, we downgrade the Treasury sector to underweight from neutral. We continue to favor shorter maturity exposures; the downgrade reflects expectations for further rate rises in 2017, led by longer maturity bonds. We also continue to hold a longer-term positive outlook across emerging markets based on the positive scenarios of reflation—growth and inflation lifting the outlook. However, our near-term caution on the strength of the dollar tempers those recommendations, as valuations have adjusted only partially offsetting those risks and keeping our exposures generally selective and in hard currency. On credit, we expect spreads to cushion the impact of higher rates. However, recent moves have pushed compensation for downside risk towards the low end of the spectrum, leaving us favoring more defensive credit allocations. Treasury Inflation Protected Securities (TIPS) retain their overweight on expectations of higher inflation in 2017.

Jeffrey Rosenberg
Chief Fixed Income Strategist
Jeffrey Rosenberg, Managing Director, is BlackRock's Chief Fixed Income Strategist with responsibilities in developing BlackRock's strategic and tactical views on sector ...