2017: Fiscal Trumps Monetary – A Year to Remember!


2017: Fiscal Trumps Monetary – A Year to Remember!


January 2017


  • We believe the bond market is in the midst of a regime shift, turning away from an overdependence on central bank policy toward one driven by fiscal policy and fundamental economic valuations. At such times of regime shift, we anticipate active management will be even more valuable in helping generate returns. We think the winning characteristics for 2017 should include the following: carry, less rate-sensitive, and more credit, idiosyncratic and thematic exposures.
  • In the U.S., we see possible upside growth surprise from new policy mix under Trump and remain moderately bearish on rates (some of the Trump effect is priced in). Inflation around the world could surprise markets to the upside, which is why we have a steepening bias for curves, such as in the Eurozone and Japan. 
  • In EM, 2017 we believe will be the year when we see more pronounced growth dividends from the recovery in commodity prices and gradual reform progress. We favor commodity exporters with high interest rates and undervalued currencies. Indonesia, Russia, Brazil and Colombia stand out. China is likely to be the major factor that can upset this recovery both in the form of lower commodity prices or by triggering a spike in risk aversion. Too fast a renminbi depreciation could trigger a series of negative developments.
  • We have a constructive outlook on U.S. investment grade and high yield, while more cautious in Europe. Our fundamental view of credit is bifurcated between industrials and financials as we expect financial fundamentals to improve, while the fundamentals of non-financial credits remain stretched. In high yield, lower-rated parts of the market offer the potential for more attractive returns, given higher spreads and an improving macroeconomic background.
  • Agency RMBS remain one of our primary concerns in 2017, due to the expectation of more Fed rate hikes and the prospect of higher mortgage rates. There is also the additional risk of the Fed ending their MBS reinvestment of pay downs as part of their MBS Purchase Program. U.S. non-agency RMBS continue to offer compelling value in our opinion, given their attractive yields, improving housing market conditions and declining non-agency RMBS supply. Overall, we find CMBS spreads/yields to be attractive, but recommend careful security selection and moderate CMBS exposure. 
The Global Fixed Income team follows a seamless process with a global outlook. They seek to identify and capture the potential value in situations where the market's implied forecasts are extreme.

The views and opinions are those of the author as of the date of publication and are subject to change at any time due to market or economic conditions and may not necessarily come to pass. The views expressed do not reflect the opinions of all investment personnel at Morgan Stanley Investment Management (MSIM) or the views of the firm as a whole, and may not be reflected in all the strategies and products that the Firm offers.

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