A new analysis published by Matt Toms, Voya Investment Management’s chief investment officer for fixed income, suggests diminished monetary policy support, tied to emerging risks that could drive downside volatility for bonds, favor “selling into strength” as opposed to “buying on weakness.”
“Across our platform of fixed-income strategies, this will be our primary focus in the first half of 2018,” Toms says.
Similar to the fixed-income market outlooks published by other large fund managers, Voya expects growth in the U.S. will remain robust, benefiting from deregulation and, to a lesser extent, corporate tax reform.
“Consumption growth will continue to be held back by income and wealth inequality,” Toms speculates. Against this backdrop, he expects the Federal Reserve’s cautious pace of interest rate normalization and balance sheet reduction will continue, despite the change in Fed membership. In addition, Toms says strong nominal growth and corporate tax cuts within the U.S. will provide a continued tailwind to corporate earnings, which will allow companies to absorb modest labor cost increases.
“Higher earnings will facilitate growth in business investment, but limited consumption growth will continue to favor a return of capital to stakeholders over significantly expanded investment,” he argues.
Running through a list of other indicators, Toms says inflation should remain below the Fed’s 2% target during the first-half of 2018, suggesting recent discussion among Fed members has “brought into question the transitory nature of the current lower level of inflation.”
“This has contributed to the flattening of the yield curve,” Toms notes. “Meanwhile, demographic shifts have caused upward inflationary pressure, specifically as Millennials begin forming households and more baby boomers retire. In addition, labor skill shortages will likely increase. However, we believe this pressure will be offset by lingering disinflationary benefits from globalization within the tradable goods sector and the ongoing influence of technology.”
Toms says Voya has the same optimism for markets outside of the United States, as global growth projections continue to be revised upwards for both developed and emerging markets.
The full fixed-income market analysis can be downloaded here.