Feb 16 Strategic view

The strong retail sales data for January suggests that the US economy is in better shape than anticipated, which may prompt the US Fed to tighten beyond the current quarter. The federal funds futures market indicates that the peak rate may be nearly 5.23%, which is higher than the median projection in the "dot plot" of the US central bank in December. As a result, Treasuries have been sold off, and the US 10-year yield has risen to 3.8%, the highest level since the beginning of the year.

Although there is a likelihood of the Fed increasing their growth forecasts and projected rate path trajectory at the next FOMC meeting in March, the view is that bond returns will recover this year. All-in yields remain attractive, especially in comparison to other asset classes. While interest rates are expected to be volatile, they are not expected to rise much higher. The pace and scale of additional rate hikes are unlikely to match those of 2022, and many central banks have succeeded in restoring medium-term inflation expectations to their target levels.

Although the inflection point in inflation may be delayed, it is not derailed, and price pressures are expected to ease through 2023. Growth is also expected to slow due to the lagged effects of last year's rate hikes. As a result, fixed income markets are expected to perform well in 2023, with high-grade and investment-grade bonds being the most preferred. Short-duration bonds remain in a sweet spot for income-seeking investors, especially for those with limited risk appetite. Emerging market bonds are also liked due to China's reopening and increased support in the property sector.