Fixed Income Insight
US growth outlook and rate quandary:
Although temporary headwinds could lead to a weaker Q3 than consensus forecast, the medium to long term growth outlook for the US remains positive.
We maintain our view that the recent spike in inflation in the US is transitory and that in the medium term, inflation will move back towards the Fed's target. That still means a higher average rate than seen since the GFC and with risks tilted to the upside.
At this point, Treasury yields – in particular inflation-adjusted "real" yields – remain well below what might be thought of as equilibrium levels.
The ECB's ability to meet its new, symmetric inflation target is complicated because it does not have a free hand in conducting its asset purchase policy.
Unless there is a sustained increase in inflationary pressure in the eurozone, it seems likely that the ECB will seek to run a loose monetary policy to help raise inflation towards its target.
This implies low interest rates and consequently low core bond yields. But it would also probably mean higher spreads in the periphery if bond buying is prevented.
Investing in sectors where ESG risks are hard to abate:
We believe that most of the companies in the steel, aluminium and cement sectors will be able to reduce their huge carbon footprint without excessively compromising their credit profiles over the next five to ten years, but that there are significant regulatory and execution risks in adopting the expensive, often unproven and difficult to implement technologies required. Due to this increasing uncertainty, it is crucial to take into account the issuers' level of preparedness to climate transition in the investment decision.
Although we have a cautiously optimistic view on the ability of producers in the steel, aluminium and cement sectors to reduce their emissions to meet regulated targets, credit valuations are tight in accordance with the overall market environment.