SUMMARY

  • Europe and China appear to be joining the U.S. in expansionary mode. Flows to their currencies are likely to restrain the strength of the dollar.
  • Populist mandates around the world are likely to further drive pro-growth policies and inflationary pressure is seen increasing.
  • Investors are trapped in trillions of dollars of low-yielding, long-duration assets. When they exit this "crowded trade," volatility is likely to result.
  • We favor a flexible, opportunistic approach to capitalize on volatility in a challenging fixed-income environment.

In this Q&A, Kathleen Gaffney and Henry Peabody share their outlooks for the bond market and the impact of stronger global growth, and how they seek to position the Multisector Income strategy.

Kathleen, could you explain why you’re a bit more bearish on the dollar than the market?

The market currently seems to have a view that the dollar is going to continue to strengthen, mainly because of the Fed's recent 25 basis point increase and the hawkish language that accompanied it.

We recognize that in the short term, hiking rates may provide a boost to the dollar, but there are a number of reasons why we think it is unlikely to continue appreciating at the current pace. First, consider that Europe and China, along with the U.S., appear to be in an expansionary mode. This is evidenced by recent Purchasing Managers' Index (PMI) data as well as sharp acceleration of new orders in manufacturing.

Assuming other major economies are in growth mode along with the U.S., it's unlikely that flows into the dollar can continue at the same pace with that kind of competition from other currencies. We are likely to see convergence in terms of rate hikes and growth all around the globe.

Moreover, there is a political aspect to this forecast. The current global political environment contains a strong populist mandate for stronger growth. We are likely to witness a transition from monetary policy to fiscal policy driving the market, and in the U.S. the focus is on bringing back jobs and manufacturing. That's going to be tough to do if the dollar continues to climb, especially given its significant rise over the past couple of years (Exhibit A).

So for reasons driven by our more optimistic view of world growth and the current political climate, we think that the dollar is less likely to appreciate as much as the market is predicting. That means nondollar currencies look more attractive to us.

How does inflation figure in the stronger growth picture?

Since the global financial crisis, inflation expectations have been nonexistent, but we're seeing inflation start to build in the system. The market has been much more concerned about deflation and the inability of global economies to get any kind of traction.