This quarter, Robert Tipp, Chief Investment Strategist, looks at the outcome of past Fed hiking cycles, other sources of volatility that surfaced in Q3, and the opportunities that have emerged within the fixed income markets, while Jürgen Odenius, Chief Economist, provides his global view of the economy, examining the likelihood of QE expansion in the Euro area, why the Japanese economy continues to struggle, and the impact of China's slowdown on the global economy.
Despite high anxiety about the Fed and Greece, we see good opportunities to add value in fixed income over the balance of the year, particularly in spread product. This view coincides with a high likelihood for positive returns over the second half of the year, especially for the higher-yielding sectors, such as hard currency emerging market and high yield corporate bonds.
With the decline in rates having come this far, the interest-rate outlook going forward is more symmetrical as the markets wait for the Fed's dots to settle. However, given the current monetary and fiscal backdrop and a global economic environment characterized by moderate growth and very low inflation, we remain generally optimistic on the fixed income markets and continue to see a wide range of opportunities to add value through active management.
Although the U.S. recovery will enable the Fed to raise rates in 2015, long-term rates in the U.S. and other developed countries are likely to remain low and rangebound. Spread products—especially the higher yielding ones—may remain volatile, but should outperform governments by significant margins over the intermediate to long haul.