Credit continues to offer opportunities

Treasury yields may remain range bound as we await clarity on tax reform. Favor credit over Treasuries.

Long-term US Treasury yields remain in a tight range as investors await further clarity on the US tax reform package and what its impact may be on economic growth and the deficit.

As Congress publically debates the tax package in its current form and economic data lacks clarity due to its distortion from the recent hurricanes in the US, Treasury yields may remain range bound.

However, we reiterate that our long-term view remains for rates to move higher from current levels (12 month US 10YR Treasury target = 2.6%). Improving global growth, moderately rising inflation and a gradual normalization of monetary policy (“QT”, to begin this month) should push yields higher from current levels. In addition, the Minutes from the FOMC’s September meeting suggest that another rate hike may be “warranted this year.”

“Currently, the Fed funds futures show that there is an ~80% chance of a Fed rate hike at their December meeting.”


We continue to favor credit over Treasuries as a better global growth environment, muted probabilities of a recession, solid corporate fundamentals (healthy balance sheets) and search for yield should keep credit supported over the next 12 months.


In addition, the potential for business-friendly policies in the US (e.g. tax repatriation and cuts) should benefit US corporations, especially investment grade due to their large cash held overseas while a better default environment should support US high yield. 


Within credit we would favor EM over high yield as a better growth outlook, sound debt indicators (public debt ratios stable), lower inflation, spreads still well above prior lows and global demand for yield should support EM bonds over the next 12 months. 


EM spreads may narrow further

Source: Bloomberg Finance LP, Deutsche Bank AG. Data as of October 10, 2017.

Christian Nolting
Global Chief Investment Officer (CIO)
Source: CIO Bulletin, October 13, 2017