Some Relief at Last
US Treasuries may bounce in Q3
The risk-adjusted returns of all parts of the US Treasury curve are set to improve over the summer. Our models suggest that investors may be revising down their estimates of the size and scope of future rate hikes from the Fed as evidence mounts of a slowdown in Emerging Markets. This would be consistent with a further flattening of the yield curve and less pressure on spreads in Investment Grade. High Yield already offers the best risk-adjusted returns in US credit. The wild card remains EM Sovereigns; contagion is a real risk, and credit quality may not be an adequate defence.