In a monthly multi-asset allocation update, the firm said it is underweight bonds including Australian bonds, global bonds and US long-term Treasuries.
It said it remains underweight on Australian bonds as it is concerned that the Reserve Bank of Australia’s hawkish tilt could lead to a short-term rebound in yields.
However, it is overweight on global high yield, US inflation linked bonds, EM dollar sovereigns and EM local currency.
The appeal of global high yield is that absolute yield levels are attractive and supportive, and spread compression is limited. Default rates are likely to rise to historical long-term averages, although much remains priced in, it said.
The firm said: “We continue to underweight duration as yields move higher on a repricing of future central bank policies. However, we mitigated the underweight for risk management purposes.
“We remain overweight high yield and emerging markets bonds on still attractive absolute yield levels and reasonably supportive fundamentals.”
Looking ahead to central bank actions, the firm said it is expecting cuts from the US Federal Reserve and European Central Bank, but unlikely to occur from the RBA.
“US Fed rate cuts look to be still in play later this year with recent signs of moderating growth and inflation. The European Central Bank appears likely to lead on cuts among major central banks.
“After hiking in March, Bank of Japan (BoJ) is still expected to take additional steps towards tightening. Markets now expect a status quo from the Reserve Bank of Australia.”
In particular, the multi-asset team is concerned about the impact of the US election in November and how it will affect central bank actions. Interest rates in the US are currently sitting at 5.25–5.5 per cent.
“With the US election looming in the back half of the year, few are expecting either political party to significantly rein in spending or address US debt, now above 120 per cent of GDP. The unbridled spending has been flagged by the ratings agencies and is causing investors, particularly foreign investors, to demand higher yields to compensate for the risk of more supply.
“For those hoping for lower rates ahead as the Fed finally reins in inflation, it could be the big spenders in Washington that end up keeping rates higher-for-much-longer.”
