Articles by Chun Wang, CFA, PRM Director of Multi-Asset Strategies

For the first half of the year, QE tapering disrupted the usual patterns for most interest rate related markets but equities are largely on track. In the second half, the common message seems to be higher volatility and lower returns.

We think 3% is the upper bound in the short term. However, we believe it will settle back closer to 250 bps by the end of the year.

20 Year T-Bond: 5 3/8’s, Maturity: 2/15/2031, YTM 2.88% (vs. April 30th YTM at 2.39%)

High yield bonds are not immune to the tapering of QE.

Inflows into Muni bond funds turned negative; higher interest rates currently the biggest risk.

Consistent with our overall cautious view on credits, we still like “safe spreads”.

The RAI rose in May and stays on a “High Risk” signal. We remain cautious and recommend higher quality within fixed income.

April inflation numbers were generally lower than expected. We are shifting out our inflation outlook by six months. We believe inflation will be a non-factor for the next six months but will increase moderately in the following six months.

The global yield curve is in a sideways range bound pattern, indicating anemic demand for credit. An examination of developed and emerging countries confirms our “muddle through” view.

We think the 10-year yield will likely consolidate around 200-215 before taking a shot at 245. The 245 level looks like a strong barrier and will likely hold in the foreseeable future.

In the medium term (1-2 years), weaker currency actually leads to lower net exports because export prices go up, instead of down, when currency depreciates.

The global economy is stuck in a “muddle through” mode with developed and emerging countries showing divergence in terms of leading indicators. Despite this divergence, they share one thing in common: an upturn in inflation. How much more room there is for easing is a key determinant of asset market performance.

The 10-year real yield turned positive at the end of 2012 and has stayed there. We expect higher interest rates, a stronger dollar, and lower gold prices in the next twelve months.

We are highly skeptical “Abenomics” can produce different results this time.

The non-seasonally adjusted CPI fell 0.5% from October to November, lower than expected.

We still think interest rates are likely to be range-bound, but the range will likely shift higher to the 185-240 bps area if the current breakout is successful.

We’re downplaying the new signal’s significance and remain cautiously optimistic towards risky assets near term. Our biggest concern is that a rise is extremely likely going forward. 

The non-seasonally adjusted CPI was essentially flat in October, in line with market expectations. 

We think interest rates will stay low for an extended period of time, so the key question is, when will rates start rising?

We see a strong and clear Poor-Value/Strong-Momentum pattern emerging, which could indicate a looming market top. While QE3 could disrupt it, the pattern looks unmistakable.