Even a strong June jobs report was unable to stop rates from heading further south, and Brexit only added to the volatility. With global economic uncertainty still prevalent, the next big question is whether rates can head even lower.
Upcoming key events in late July include the BoJ policy meeting along with anticipated additional fiscal policy accommodation. In Europe, the results of the EU-wide stress tests to be announced July 29 hold significance critically for the Italian banking sector. Post-Brexit, the resulting economic uncertainty pauses the Fed’s path towards normalization. While U.S. equity markets appear to take comfort in the postponement, we worry a bit more about the complacency in what lies ahead: little further room for monetary policy accommodation to effectively stimulate the real economy. That keeps us cautious on U.S. credit, favoring higher credit quality instruments with greater liquidity, upgrading investment grade. Longer duration continues to be a focus as global accommodation supports the back end of U.S. curves. Pausing Fed normalization stabilizes the outlook for emerging markets (EM) debt, and we upgrade the sector this month. And extended moves lower in global developed market rates, alongside a stable to favorable outlook for the U.S. dollar, lowers our recommendation on non-USD for USD-based investors.
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