Our target allocations have not changed. Credit spreads rallied in September as risk asset classes benefitted from optimism over a tax reform plan, a firmer backdrop for oil prices and energy-related issuance, and equity market record highs. US dollar (USD) corporate bond fundamentals continue to improve with leverage metrics declining and only isolated pockets of defaults. Valuations largely reflect these developments and are trading toward the tighter end of what we view as fair valuation. In the months ahead, we see potential volatility as investors react to global central banks beginning the process of balance sheet normalization. However, we expect investment grade and high yield USD-denominated credit to remain well supported by attractive yield differentials compared with global credit alternatives.
We expect moderate 1% to 3% gross domestic product (GDP) growth and inflation, with headline and core measures trending around Federal reserve targets. Robust consumption and housing, modest fiscal spending, and a moderate business investment rebound will be key drivers. The labor market is likely to be at or below full employment, with gradually increasing wage growth. Two to three rate hikes in each of the next few years are likely, alongside gradual balance sheet tapering.
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