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CONTRIBUTORS

Paul Mielczarski

Head of Global Macro Strategy & Portfolio Manager

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Election uncertainty challenges bond-friendly fundamentals

The macroeconomic backdrop is becoming increasingly favorable for G10 bond markets after a difficult start to the year. Hot US inflation prints in the first quarter raised doubts about the Federal Reserve’s (Fed’s) ability to cut rates in 2024. However, more recent data shows a resumption of the disinflationary trend. Meanwhile, growth in the US slowed in the first half of 2024. Further weakness may be in store as the economy adjusts to high interest rates and reduced fiscal support.

Overall, we expect slower nominal gross domestic product (GDP) growth across G10 economies. In turn, this slowdown will enable central banks to lower policy rates from restrictive levels, supporting bond market returns. Moderation of US growth together with less restrictive Fed policy should be negative for the US dollar.

However, the market outlook is clouded by high policy uncertainty ahead of the US election. In the coming months, market fluctuations will become increasingly driven by opinion poll shifts. In our view, the most consequential uncertainty is around future US trade policies.

When it comes to portfolio strategy, it is unclear if risks associated with election uncertainty are adequately compensated. Therefore, reducing portfolio risk may be prudent. Additionally, we believe it makes sense to focus on positions that stand to gain from the medium-term economic outlook and are less likely to be impacted by the US election outcome.

This quarter’s Macroeconomic update also covers:

  • Growth and Inflation Continue to Moderate
  • Trade Policy Uncertainty
  • Strategy Implications

Definitions:

The Group of Ten (G-10 or G10) refers to the group of countries that agreed to participate in the General Arrangements to Borrow (GAB), an agreement to provide the International Monetary Fund (IMF) with additional funds to increase its lending ability.
 

WHAT ARE THE RISKS?

Past performance is no guarantee of future results. Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls. International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Commodities and currencies contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors.

U.S. Treasuries are direct debt obligations issued and backed by the “full faith and credit” of the U.S. government. The U.S. government guarantees the principal and interest payments on U.S. Treasuries when the securities are held to maturity. Unlike U.S. Treasuries, debt securities issued by the federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the U.S. government. Even when the U.S. government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the market value of these securities.