Fixed Income
With economic headwinds building and fiscal dynamics shifting, bond markets are at a turning point. Our latest note outlines why German bund yields are set to decline and why UK gilts are poised to outperform — and how to position accordingly.
This morning’s weak consumer spending and strong inflation data reinforce our sense that the US economy is heading toward recession.
In this Second Quarter Strategy Outlook, we explore the major trends that are set to drive financial markets for the rest of 2025 and beyond.
There is an ongoing regime shift in Indonesia: SOEs will be used to drive economic growth. Bank loans will accelerate, but their profit margins will shrink. Despite higher nominal growth, Indonesian equity prices in US dollar terms will not see a sustainable bull market. Downside risks to currency and upside risks to domestic bond yields have also increased.
An analysis of historical data shows that Ba-rated bonds outperform other corporate credit tiers in the long-run on a risk-adjusted basis. That said, today’s fragile macro environment warrants a more cautious allocation.
Households’ healthy balance sheets do not square with the rise in credit cards and auto loans delinquencies. The tailwinds that have supported higher-income cohorts’ spending have faded, presaging broad-based deterioration in credit performance.
Brazilian policymakers are stuck between a rock and a hard place. There is no combination of fiscal and monetary policies that can assure decent growth, on-target inflation, a stable exchange rate, and public debt sustainability. We recommend investors maintain an underweight allocation to Brazilian fixed-income markets versus their EM peers and continue shorting BRL versus MXN. We have been bearish on the Bovespa in absolute terms and are now downgrading Brazilian stocks from neutral to underweight within an EM equity portfolio.
The South African government seems to believe that some fiscal retrenchment can stabilize the public debt-to-GDP ratio. But that’s a misconception. The country will need draconian spending cuts to achieve this.
The market reaction to this afternoon’s Fed meeting looks overdone. Investors could be in for a hawkish surprise when it becomes apparent that the Fed won’t ease policy into higher tariff-driven inflation prints.