- Geopolitical concerns and monetary policy changes to continue to influence growth expectations and bond yields
- Interest rates not likely to rise significantly given global growth will decelerate and inflation pressures remain tepid
- Our base case forecast –
1) Government bond yields to rise about 30-50 bp across the curve and so we prefer bonds that are shorter in duration as they are less sensitive to changes in interest rates;
2) High yield spread at near 500 bp above government bond yields by end of 2019
3) Defaults of 1.8% in Europe and 2.5% in US – lower than long-run average annual default rate of 4.4% for high yield
- The end of credit cycle is at least a year away
We think that as global economic growth slows near trend, so will the expansion phase of the credit cycle. The cycle will turn eventually, just not this year. Investors should not be overly concerned about it. The two major developed high yield market segments are fairly valued, so stay engaged for the income benefits and carry 500!
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