The Fed is done hiking, US Treasuries should rally. Do you own any? We favour unhedged on currency
This morning the US Federal Reserve removed all further expected rate hikes for 2019 (via its projected 'dot plot' series) in acknowledgement that ''economic growth has slowed''. They also plan to taper the balance sheet roll off, with a full halt by September this year. Both of these developments should be bullish for US Treasury Government Bonds. We have noted in previous investor presentations that the US 10 year Government Bond rate has been at or below the level of Fed Funds at the ''terminal rate'' in every cycle of the last 50 years.
Did the Fed just go terminal (ie is +2.50% the highest Fed Funds of this cycle)? We think so, the incoming data globally remains very poor with weakening velocity. This should leave US Treasury Bonds with plenty of runway for continued capital gain. US Government Bonds also have the highest income yields in the G7 by a significant margin, potentially making their expected total returns (bond income plus or minus capital gains) look healthy this year within the defensive asset complex.
JCB still expects further $AUD currency depreciation over the year as the Australian housing recalibration drags on the economy, so our preference for international bond allocations remains on an unhedged currency basis. A defensive allocation on an unhedged currency basis can sling shot performance should the $AUD depreciate, as we have seen in many previous risk market drawdowns. Such an allocation throughout the GFC would have returned more than 50%.
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Charles is a co-founder of Jamieson Coote Bonds (JCB) and oversees portfolio management of the Australian and Global High Grade Bond and Dynamic Alpha investment strategies. Prior to JCB, Charles forged a career as a seasoned bond investor from...
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