Since the beginning of this year, US treasury yields have been steadily rising across the curve. Bond prices have since given up a significant portion of the gains made in the mid-November 2023 rally. This trend reflects a more resilient US economy and the persistence of inflationary pressures. The recent stronger than expected U.S retail sales growth, reinforces this view. As a result, the "higher for longer" scenario seems increasingly likely for 2024.

The bond market has also reflected this resiliency with credit spreads tightening across the board, especially in high-yield corporates.

As it stands, credit fixed income investors are enjoying high and steady yields of 5-6% from quality USD credit assets. For seasoned market players, this presents a favourable environment, akin to a "Goldilocks moment," for USD corporate bond markets.

Globally, policy rates are at an inflection point, with Switzerland and Mexico leading the forthcoming rate-cut cycle with their first rate cuts after the pandemic. The big question is when and how fast will the US and the rest of the world follow.

Extending the timing of the rate cuts puts a strain on the economy, increasing the risk of a deep recession should rates stay too high for too long. Thus, while we incrementally increase the duration to participate in the approaching rate-cut cycle, we remain prudent in selecting high credit-quality corporates to protect the portfolio in the event of a downturn.

Investors should seize the opportunity to bolster their fixed income investment allocations to enjoy high steady income
stream for the years ahead.

29 Mar 2023