Last updated: 13:41 / Tuesday, 22 November 2016
Analysis by Morgan Stanley

Caution Going Into the Fourth Quarter

Caution Going Into the Fourth Quarter

Looking in the near term, Morgan Stanley Global Fixed Income continues to expect an environment of dampened interest-rate volatility, which means a good environment for carry. "We expect contrasting forces of slow but stable global growth but perhaps higher inflation expectations to keep long-end rates trading in a range with a slight upward bias." They explain.

However, given ongoing policy reconsiderations at central banks and a predilection to believe global growth will be higher next year is wary of sharp curve steepening and thinks underweights in risk-free rates provide a good hedge to carry oriented strategies.

"We remain optimistic about the prospects for emerging markets (EM) fixed income for the remainder of the year as fundamentals, technicals and the macro environment remain supportive," the firm states, adding that, the various factors both pushing and pulling investors into EM fixed income remain in place: Developed market yields remain very low, economic data in EM appears to have stabilized, fears of multiple Federal Reserve (Fed) rate hikes have subsided and concerns of a sharp slowdown in China have diminished. However, Morgan Stanley Global Fixed Income believes U.S. elections reflect a major event risk for some key EMs and the outlook for global trade.

"Accommodative policy and low global yields remain supportive of global credit, particularly U.S. credit, and we continue to believe the strong technical environment in global credit markets suggests a slow grind tighter into year-end. We remain cautious, however, as we enter the last quarter of 2016, and continue to watch for potential risks," they conclude.

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1614020 Exp. 10/11/2017