The ultimate question is whether the Fed’s recent “insurance cuts” are enough to overcome uncertainties about trade talk—and the upcoming election—to avert a recession. We updated our “Slowdown vs. Recession” study to see where we stand now. The bottom line is: It’s too early to rule out a recession.
With the Fed now pausing its rate hikes, and the PBoC recapitalizing banks and reactivating lending, our view on credit has turned from defensive to neutral, with a more constructive bias. One of our biggest concerns, global central bank liquidity withdrawal, has been eased by the recent policy moves.
Many were caught off guard by the relentless drop in stock prices and bond yields, but we think the real problem is that most people have underestimated the twin threats of central bank tightening and the ongoing trade war with China.
The underperformance of investment grade credit this year prompted the question of whether a risk-barbell portfolio of safe Treasuries and risky high-yield bonds may offer better performance than a middle-of-the-road portfolio of 100% investment grade corporate bonds in a highly-uncertain environment.