The hawkish stream of Fedspeak that happened recently, coupled with continued robust global growth dynamics, maintains a bond-unfriendly environment justifying an underweight in developed market government bonds, according to HSBC Global Asset Management.
Despite this hawkish shift justifying an underweight in developed markets government bonds, ‘recent market-price action has improved relative valuations for DM government bonds, particularly US Treasuries,’ according to HSBC GAM.
The firm said investors seem to be pricing in a significant level of US stimulus and the maintenance of positive macro momentum.
‘With this abrupt shift in perceptions of bond risk, we think there is a strong diversification case for owning Treasuries as insurance against a worsening global growth picture, should this happen.
‘We retain our neutral view for global equities, with a preference for emerging markets, Japan and eurozone over the US and UK, short-duration high-yield credit and local-currency EM debt, within the context of a well-diversified multi-asset portfolio, from a strategic and long-term perspective.’
Last week, Federal Reserve vice chair William C. Dudley commented that the next rate hike could come 'fairly soon'. Fed chair Yellen also stated that a March rate hike would be 'appropriate' if the economy evolves as expected.
Sandwiched between this was Fed governor Brainard, who said that the economy could handle a rate hike 'soon'.
According to HSBC GAM, these comments were made in the context of recently rising equity prices and dollar softness, helping to loosen financial conditions. ‘Overall, they are as explicit as can be expected from central bankers, with market pricing having moved accordingly,’ noted the firm.
These comments do not appear to be driven by the potential for fiscal stimulus from President Trump.
‘The Fed’s last set of economic forecasts released at the end of December clearly did not fully factor in a significant fiscal boost.
‘Indeed, Fed chair Yellen recently went so far as say it would be best to wait and see what is agreed. This is a prudent stance, given that tightening on the basis of a fiscal stimulus that does not materialise would be more dangerous than undoing the damage from hiking too late.
‘Therefore, room for an upward projection to the economic projections once/if a stimulus is agreed raises the possibility of a further hawkish drift.’