Last updated: 08:35 / Wednesday, 21 December 2016
Analysis by Morgan Stanley

Passing the Baton to Fiscal Policy

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Passing the Baton to Fiscal Policy
  • Economic fundamentals are looking better than the bearish consensus, says Morgan Stanley Global Fixed Income team
  • Morgan Stanley Global Fixed Income team remains optimistic about the prospects for emerging market fixed income for the remainder of the year
  • The team anticipates U.S. investment-grade (IG) credit will continue to outperform European IG

Economic fundamentals are looking better than the bearish consensus, says the Morgan Stanley Investment Management Global Fixed Income team. Yet, politics has been more disruptive to markets this year than expected and could get more fraught in 2017, with U.S. presidential and core European elections, Brexit negotiations and the Chinese politburo transition.

“We believe in this environment, riskier spread products could weather a gradual rise in risk-free rates, especially if it is supported by stabilizing or improving economic fundamentals. However, we are cognizant that, as psychological resistance levels get broached, rising yields could take on a life of their own. We have been reducing risk to help stay ahead of a possible bond tantrum and prefer spread exposures that are less correlated to interest-rate movement”, explains the team.

Subject to potential near-term event risks being resolved in the next few weeks, the Morgan Stanley Investment Management Global Fixed Income team remains optimistic about the prospects for emerging market fixed income for the remainder of the year as fundamentals, technicals and the macro environment remain supportive. China’s growth slowdown is likely to continue in the medium term, with short-term growth prospects reliant on continued fiscal and monetary policy support.

“We anticipate U.S. investment-grade (IG) credit will continue to outperform European IG, as the technical picture remains more supportive in the U.S. due to a more favorable yield environment. We maintain our constructive view on high yield as the global demand for yield continues to support this asset class in both the U.S. and Europe”, conludes the Morgan Stanley Investment Management Global Fixed Income team.

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1640616 Exp. 11/08/2017

 

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