Podcast: Poor visibility on US soft-landing, no-landing
Some saying that “So market is dependent on the Fed, and the Fed is dependent on data, and data is dependent on economy that both market and the Fed have found it difficult to forecast”. This phrase describes precisely what investors are facing now. There is no clear visibility on whether the US economy will be heading to a soft-landing, going into a recession or even no-landing. Market volatility has been rising as market tries to interpret the future Fed rates from the economic data released every day.
Recently, good news on economic data has become bad news for markets. There has been an upward shift in Fed rate expectations amid stronger-than-expected US economic data in recent weeks. Market currently expects the Fed funds rate to peak at 5.4% in July and only 10bp cut in 2H 2023 (versus expectations of 4.9% in June and 50bp cuts in 2H 2023 in early February).
In fact, the whole US yield curve has gone up with 2-year to 7-year US Treasury yields seeing the most upward adjustments. This implies better entry points for short-to-medium duration investment grade bonds.
Apart from quality corporate bonds, alternative investments such as global macro, CTA, relative value, equity long/short, distressed credit, and/or event driven hedge fund strategies are also good tools for portfolio diversification to deal with market volatility.