Cautious on yields, selective on spreads amidst a more confident Fed

• Fed: The FOMC left the funds rate target range unchanged at the January meeting (1.25%-1.50%), reinforcing, in our opinion, the likelihood of delivering three hikes this year.

• Economy: The economic assessment, upgraded in some part, highlighted that all domestic engines of growth (employment, household spending, business fixed investment) are working properly to propel strong demand. The Fed also upgraded the inflation assessment, recognising improvements in some compensation measures.

• US dollar: Different factors point to a continuation of dollar weakness and we forecast a modest trade-weighted depreciation for the USD this year. This being said, the current pace of USD depreciation seems exaggerated and this could lead to some corrections.

• Market: We believe investors should position their portfolios to defend against rising interest rates, with underweight positions in U.S. and hold overweight vs. the index in a diverse range of spread sectors. We would recommend an overweight to securitized sectors. Given extended valuations across both U.S. investment grade and high yield markets, we do not believe this is a time to be overly exposed to credit risk, particularly corporate credit risk.

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