Fixed Income

The sharp equity market correction in recent weeks after a very strong run over the past year will not have a crisis-level impact to the broader economy.

The IMF has been supportive of China's attempt to be included, but has not indicated that it recommends it. Furthermore, there is a risk that most of these reforms are too new for the IMF to judge whether they are effective or sustainable.

Although the recent bond market sell-off may remind the market of 2003, we don’t believe US bonds will be as badly affected. By comparing the worst US bond sell-offs since 2003, we estimate that the 10-year US Treasury yield could hit a high of 2.8-3.2% by October.

Real yields and inflation expectations currently suggest exceptionally low growth and low inflation far out into the future.

We do not expect the recent steepening of the bund yield curve to be the beginning of a sustained new trend. Moreover, Eurozone and German economic data, albeit improving, are not sufficient to support the higher bund yields on a sustained basis.

Since the Fed starting hinting at the normalization of interest rates a year ago, Asian central banks' foreign reserve accumulations - except for India and Hong Kong - have either incurred substantial losses or remained flat.

With many markets having rallied from major support levels when they were in highly oversold positions, we believe that bond markets should stabilise or rally from current levels.

Oil-producing countries have seen the largest drop in their foreign exchange (FX) holdings over the last year. In our view, Saudi Arabia can afford to handle oil prices at their current level for some time but ...

Interest rate and foreign exchange volatility has begun to increase as the market anticipates the time when the US Federal Reserve will start to reduce monetary accommodation and raise interest rates.

Coupled with our expectation for global bond yields to rise moderately, we maintain our overweight view on global equities vs. bonds.

In 2015, markets will be looking for any pick up in European and Japanese inflation as a result of their QE programmes. With growth picking up, we may start to see signs of a rise in US inflation.

The key theme of the past few years has been quantitative easing. Although the US has come to the end of its version of this experiment, QE programmes have begun or are about to begin in Japan and Europe.

In a pre-GFC and pre-QE world, zero or negative interest rates on a German, Japanese or US 10-year bond would have been considered highly implausible. However...

ECB's QE: The major question is, will this program work given the European model of debt creation is via the banking system and not the bond markets?

As we move further away from the turbulent period between 2007 and 2009, interest in credit has increased rapidly as investors globally search for extra return in a low yield environment.

If the RBA does cut interest rates, it is likely that they will make more than one cut, so we could see Australia's official cash rate at 2.00% by the second quarter of 2015.

2014 has become a landmark year for green bonds, having become one of the few sustainable investment instruments to reach a suitable scale and poised to enter the mainstream for global institutional investors.

Physical credit spreads have remained at reasonably tight levels due to the ongoing search for yield — although global uncertainty in the Middle East, fears about Ebola, and re-emerging concerns about Europe have generated negative sentiment.

The Australian economy seems to be struggling to achieve traction as the mining boom transitions from a capital expenditure phase to a shipment phase.

Prior to the global financial crisis, nearly $17 trillion of developed nation bonds were rated AAA. Now there are less than $2 trillion. Not only has supply been restricted, but also diversity, with the number of AAA rated countries falling from 15 to 9.

In the Australian credit market, the relative lack of supply compared with demand continues to cause spreads to tighten in the physical market offsetting the risks of an unstable geopolitical environment.

Reasons for the recent weakness in the AUD include a fall in the iron ore price, the rally in the US dollar, weaker Chinese data, and indications that the Reserve Bank of Australia is considering macroprudential controls.

Credit spreads generally continued to tighten in August, although Australian physical spreads were mainly flat over the month.

At its 2 September meeting, the Reserve Bank of Australia again left the official cash rate on hold at 2.50%, and the Australian Industry Group’s Performance of Manufacturing Index slipped back into negative territory in August, following a brief stabilisation in July.