Yellen's Dovish Tone Rallies Markets
By Nick Maroutsos
Fed Chairwoman Janet Yellen’s message in her semi-annual testimony on Capitol Hill was largely consistent with market expectations. She remained consistent in her message that additional tightening this year is appropriate despite recent inflationary weaknesses. Her overall tone was taken as dovish, which resulted in both equities and interest rates rallying.
We remain confident that the Federal Open Market Committee (OTCPK:FOMC) will be sidelined for the balance of the year given Brexit concerns, European banking volatility, slower growth in Asia markets, geopolitical risks and little progress in Trump’s economic plans.
Within short duration income, we see increased opportunity outside the U.S.
In global bond markets, Australian and New Zealand rates appear more attractive versus the rest of the world. We expect the Reserve Bank of Australia [RBA] to remain on hold for the remainder of 2017. Housing and labor markets will remain key factors in future growth and inflation expectations and we expect the RBA will await further data before acting. We continue to hold a positive view on investment-grade credit in Australia, largely due to attractive real yields and the healthiness of issuers compared to other developed markets.
Additionally, we see value in systemically-important, highly-rated Asian issuers such as government-related energy, telecom and banking entities and in the U.S., the ‘too-big-to-fail’ banks, whose bonds should be supported by an increasingly robust regulatory environment focused on less risk taking and greater capital requirements. We expect corporate profitability to remain strong, aided by less regulation and lower taxes.
In Europe, we find little value given the low and negative yield environment.
As for the Central Bank in the U.S., we believe rates will underperform the rest of the world as the U.S. recovery continues.
Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.
Foreign securities are subject to additional risks including currency fluctuations, political and economic uncertainty, increased volatility, lower liquidity and differing financial and information reporting standards, all of which are magnified in emerging markets.
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