With three Federal Reserve (Fed) meetings left in 2016, the bond market is currently assigning about a 50% probability to a hike before year-end.
While the market’s rate hike expectations have been dampened over the past few weeks following weaker-than-expected reports on capital spending and labor market data in the U.S., we believe it still seems more likely than not the Fed will raise rates before year-end, particularly if there is any strengthening of economic data over the next couple of months. So how should one position a bond portfolio now if a Fed hike is likely in the near term?
Our approach is to continue to focus on income, particularly in certain sectors such as European high yield and U.S. high yield loans, and we favor a more conservative duration tilt. We elaborate below on these areas of opportunity.
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