Bond market view: smooth landing in sight?

The US Federal Reserve’s policy pivot has ushered in a new investment regime that should help cushion the slowdown in the US economy and provide a near-term floor for risk sentiment. We think the Fed’s move can ensure favourable conditions for bond markets – and see opportunities within yield curve steepeners and duration, as well as defensive options in case the economic outlook darkens.

Key takeaways

* We think the timing of the Fed’s move can help cushion the US economy’s slowdown at a time of a softening in labour markets, and signals an about-turn in the “higher-for-longer” policy messaging earlier in the year.
* Markets are pricing in a smooth landing and the macro and monetary policy backdrop makes us believe a soft landing is achievable – but risks ranging from higher oil prices to the US election outcome may disrupt the benign outlook.
* We are positive on the outlook for sovereign bond returns, given the current global macro and policy backdrop and are overall constructive on duration, but prefer to be positioned for yield curve steepeners, rather than outright duration, in the US and Europe.
* We see value in having some allocation to inflation, given the reflation risks stemming from the degree of policy easing currently being priced and think bond markets may be too quick to dismiss the risk of a more severe slowdown; we see scope for adding duration risk opportunistically, as yields back-up.