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.
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