Schroders Investment's Global Head of Fixed Income, Julien Houdain, stated that on the economic front, the firm remains optimistic about the US economic outlook.
Household consumption is solid, with large-scale investment in AI infrastructure and technology hardware serving as important support; volatility in AI sector stock prices represents short-term noise, related capital expenditure plans remain strong, and a significant weakening in AI investment is only a tail risk rather than a baseline forecast.
Using a scenario probability analysis framework, Schroders designates "economic reacceleration" as the base case, with "economic overheating" involving three or more Federal Reserve rate hikes as the primary tail risk, while revising down to zero the probability of the Fed holding rates steady or cutting them.
Schroders believes that only a major disruptive change would make rate cuts or a hold scenario materialize, and the market is currently pricing in a significantly higher probability of economic overheating.
Julien Houdain believes the Fed does need to tighten monetary policy, but this round leans more toward a recalibration cycle.
Inflation remains above target, with CPI data continuously confirming inflationary pressure, though overall inflation pressure is still moderate, with core inflation in a range of approximately 2.2% to 3%.
Short-term services inflation is elevated, which will push the Fed to continue raising rates; the firm expects that as temporary disruptions such as tariffs fade, inflation should improve in the first half of 2027, which would in turn constrain the ultimate magnitude of this rate-hiking cycle.
On bond allocation, Schroders maintains a neutral stance on US Treasuries.
Yields above 5% on 10-year US Treasuries are attractive, but the market has already largely priced in Federal Reserve rate hike expectations, and combined with economic resilience and elevated inflation, short-term US Treasuries lack catalysts for significant outperformance.
Regarding regional preferences, Canada and Europe remain the firm's preferred bond markets.
The Canadian economy is moderate, with the risk of core inflation falling below target exceeding the risk of an upside surprise, and the labor market is weakening; although the Bank of Canada has taken a hawkish tone, the market has fully priced in expectations of further significant tightening.
The eurozone faces energy price-driven inflation, the ECB remains in a rate-hiking channel, sovereign bonds are under pressure, and the negative impact of tightening on the economy is gradually emerging; the firm expects the ECB to raise rates at least once more in December, but the eventual pace of hikes will fall short of aggressive market expectations.
On credit rating adjustments, Schroders has upgraded European investment-grade and high-yield corporate bonds to neutral.
Previously, the sector had solid fundamentals but elevated valuations, and the recent widening of credit spreads has enhanced its appeal; the firm maintains a cautious stance on US corporate bonds, where valuation adjustments have been relatively smaller.
At the same time, the firm has upgraded emerging market local currency bonds to a positive view, favoring investment opportunities in markets such as Mexico.
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