More spread compression is likely ahead.
There is still a lot more room for Munis to underperform Corporate bonds.
We will be looking for a good follow-through to consider an upgrade of these bonds.
Despite the improvement in market sentiment, U.S. bond yields were dragged lower by their international counterparts.
The market’s latest infatuation with bonds was driven by grave concerns that the weakness in energy and manufacturing sectors might be spreading to the U.S. economy as a whole.
We believe a short term rally is more likely and recommend a neutral stance towards credits at this point.
Given more attractive valuations, we tactically upgraded investment grade Corporates to Favorable.
We think the Fed’s projection of four more hikes this year is absolutely unachievable, and we are no doubt siding with the market’s current projection of one hike, at most (if any), this year.
The transition we saw last year from a mostly Risk-On (or Easing) environment to a more challenging Tightening (or Risk-Off) environment has made the relationship especially volatile.
We are aware of the oversold condition in oil but we expect volatility to remain high in the near term. We maintain a defensive stance towards credits at this point.