Latest Fixed Income outlook from Nick Gartside, International CIO for Fixed Income at J.P. Morgan Asset Management:
"Well, the sweet spot is certainly where markets seem to be at the moment. Bond yields are only modestly higher year to date (US 5yr bonds are 15bp higher in yield) and risk assets have had a good start (S&P up 6.5% and US high yield bonds up 1.1%).
"This price action and sense of calm is reflected in our proprietary leading economic indicators. These show G10 economic growth back to trend levels with the UK and Japanese components above trend. Irrespective of the level, the upward move from the troughs of six months ago shows a significant and impressive recovery. Looking at markets a key question is why this improvement has been reflected in risk assets, but not in core bond yields which remain at the same level of six months ago? Of course, perhaps this is precisely the point. In the absence of strong growth the low cost of capital for consumers, households, and corporations has spurred growth and in turn has helped to fuel risk asset valuations. The converse of this is that a sharp rise in bond yields, and a correspondingly higher cost of capital for consumers, households and corporations, is potentially worrisome for risk asset valuations.
"It is clear the sweet spot is built on the foundation of low bond yields. The speed and magnitude of movements in bond yields will determine whether it is built on sand, or cement. Clearly, central banks are aware of this which is why the Fed continues to purchase US$85bn of securities each month, the Bank of Japan is likely to extend its quantitative easing programme and other central banks maintain loose policy, all in turn supportive of low bond yields. The corollary of this is that the sweet spot could well endure for longer than many think and bond underperformance, particularly in credit and emerging markets, may not be as large as some predict."
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