Developed Countries

Share buybacks have been a key pillar underpinning stocks since the GFC averaging roughly $500bn/annum since 2010. But, last year equity retirement jumped to nearly $1tn/annum. That is clearly unsustainable, warning that there is a disconnect between the S&P 500 and already steeply decelerating share buybacks. Our equity retirement estimate for next year is a return to the 10-year average, signaling that the market may hit a significant air pocket (top panel). Further, if margin debt that typically confirms SPX breakouts does not recover soon, it will exert downward pull on the broad market (middle panel).   The S&P 500 earnings growth surprise factor, which is based on sell side analysts’ 12-month forward EPS forecasts, also suggests that 10% profit growth is not plausible for 2020. Bottom Line: Remain cautious on the prospects of the broad equity market. For more details, please refer to the most recent Weekly Report.    

Highlights Global Growth: The latest readings from our global leading economic indicator and the global ZEW index show further improvement in growth momentum. Maintain a below-benchmark stance on global duration, favoring inflation-linked bonds/swaps over nominal bond exposure, while positioning for steeper government bond yield curves. New Zealand: The RBNZ is likely done cutting rates, amid signs that the momentum is bottoming for both growth and inflation in New Zealand. Take profits on our long-standing recommended NZ-US and NZ-Germany 5-year government bond spread trades. Feature Investors have a lot of information to process at the moment. The daily ebb and flow of headlines on the US-China trade negotiations remains the biggest source of intraday volatility. Yet there are also mixed signals coming from economic data releases. “Soft” survey data like global manufacturing PMIs are showing some improvement, while “hard” measures of economic activity like export volumes and capital goods orders continue to languish in both the developed and emerging economies. As we have discussed in recent reports, these sorts of cross-currents are typical at cyclical inflection points. “Hard” data is reported with a lag after “soft” data, making the latter a better indicator of future economic activity than exports or fixed investment data (or even GDP data) that can be several months old once reported, reducing their market-moving relevance. The indicators that we trust the most are sending a bullish message on growth – and a bearish message for government bonds. When global growth is in the process of bottoming, as appears to be the case now, leading economic indicators are more reliable guides to follow for investment decision-making. To that end, the indicators that we trust the most are sending a bullish message on growth – and a bearish message for government bonds. The Latest From Our Global LEI & Global ZEW Chart of the WeekMore Cyclical Upward Pressure On Bond Yields We received updates on two of our most reliable indicators – our global leading economic indicator (LEI) and the global ZEW expectations index – last week. Both showed broad-based improvement, highlighting that the sharp downward momentum in global growth seen over the past year is in the process of bottoming out. The global LEI and the global ZEW index are key inputs into our Duration Indicator, which has historically led developed market bond yields by between six and nine months (Chart of the Week). The Duration Indicator bottomed back in January of this year and, right on cue, the yield on the Bloomberg Barclays Global Treasury Index has gone up 28bps from the low seen on September 3. The improvement in our global LEI is also broad based. The diffusion index (i.e. the share of countries with a rising LEI) shows that around 75% of the countries in the global LEI are experiencing improved economic activity. Importantly, that share is consistent across both the developed market (DM) and emerging market (EM) nations in the indicator, heralding a synchronized improvement in global growth. (Chart 2).   In absolute level terms, however, the EM sub-component of our global LEI has shown the most dramatic improvement over the past several months, compared to the DM sub-index that is only in the process of bottoming out. The EM index is boosted by improvements in large economies like China and Mexico – countries that have seen significant easing of monetary policy and financial conditions over the past 6-9 months. At the same time, the lagging performance of the DM component of our global LEI is consistent with the more subdued signals to date from the individual DM country data. The US LEI continues to drift lower, while the LEIs within the euro area for Germany, Italy and (most notably) France have all been moving higher (Chart 3). Even the Japan and UK LEIs have picked up a bit, although both remain at only moderate levels. At the same time, the expectations components of the individual country ZEW surveys have all begun to increase (bottom panel), despite more mixed performance within the current conditions components of the same ZEW survey (top panel). Chart 2Our Global LEI Continues to Climb, Led By EM Chart 3A Mixed Bag Of DM Growth Indicators Without a doubt, a reduction of US-China trade tensions would flatter the bullish growth signals seen in the global LEI and ZEW indices. Yet the turn in these indicators is so consistent, across so many countries, that we suspect it has more to do with the easier monetary policies, and the associated loosening of financial conditions, that have taken place in response to the uncertainty over global trade. The turn in these indicators is so consistent, across so many countries, that we suspect it has more to do with the easier monetary policies, and the associated loosening of financial conditions, that have taken place in response to the uncertainty over global trade. Taken together, these signals are all bond-bearish, on the margin. The diffusion index of our global LEI has proven to be an excellent leading indicator of the real component of DM bond yields, leading the latter by around one year, and is pointing to higher yields ahead (Chart 4). At the same time, the inflation expectations component of DM yields (measured using CPI swaps rates) is also expected to drift higher in the next 6-12 months, led by firmer oil prices and some softening of the US dollar. Global central banks will maintain a dovish bias over at least the first half of 2020, to ensure that there is enough positive growth momentum to push inflation expectations back up towards policymaker targets. This means that there can be some modest bear-steepening of government bond yield curves across the major DM nations over the next 6-9 months (Chart 5), as policymakers will not begin to raise policy interest rates too soon. Chart 4Global Yields Moving Higher For The Usual Reasons Chart 5Higher Inflation Expectations = Steeper Yield Curves Chart 6Global Yields Starting To Climb Above Moving Averages The notable exception is the UK. Inflation expectations there are already elevated due to Brexit uncertainty, which has depressed the pound and reduced UK productivity growth while forcing the Bank of England to maintain highly accommodative monetary policy – all factors that should result in higher UK inflation, both realized and expected. Yet even there, the nominal Gilt curve has been bear-steepening of late, alongside the similar trends seen in the other major DM countries like the US and Germany. The move upward in global bond yields suggested by our most reliable leading indicators suggests more of a slow grinding increase in yields (through higher inflation expectations) rather than a rapid acceleration of real rates. The latter would require a shift towards more hawkish central bank monetary policies, which will not happen before there is a sustained pickup in both growth momentum and inflation expectations. The Federal Reserve is the central bank that is likely to lead that transition, but not until late in 2020 and perhaps not until after the November US presidential election. At the country level, the move upward in yields since the early September lows has begun to take out some technical targets (Chart 6). The benchmark 10-year government bond yield is above the 100-day moving average for the major DM countries (the US, Germany, UK, Japan, Canada and Australia). The 200-day moving averages represent the next key resistance level for those markets. The 10-year yield in Japan has already breached that level, perhaps signaling that similar breakouts are on the way in other major markets. Bottom Line: The latest readings from our global leading economic indicator and the global ZEW index show further improvement in growth momentum. Maintain a below-benchmark stance on global duration, favoring inflation-linked bonds/swaps over nominal bond exposure, while positioning for steeper government bond yield curves. Time To (Finally) Take Profits On Our New Zealand Spread Trades We have been structurally positive on New Zealand (NZ) government bonds since mid-2017. This was originally a shorter-term “tactical” view based on expectations that the Reserve Bank of New Zealand (RBNZ) would be forced to keep policy rates steady due to sub-par domestic economic growth and sluggish inflation. Since this was occurring at a time of improving global economic growth in 2017, especially in the US and euro area, we expressed our view as spread trades between 5-year government bonds in NZ versus equivalent maturity debt in the US and Germany (hedged back into US dollars and euros, respectively). The “tactical” trade turned into a medium-term recommendation, as the NZ economy and inflation slowed more than expected. NZ government bonds significantly outperformed global peers as a result, helping boost the returns on our recommended trades. The 5-year NZ-US yield spread has fallen from +74bps when we first initiated the trade to -52bps today, while the spread for 5-year NZ-Germany has narrowed from +292bps to +171bps (Chart 7). We now see several good reasons to take profits on those long-standing positions: NZ economic growth is set to improve The year-over-year growth rate of real GDP in NZ has slowed from 3.1% in mid-2017 (when we initiated our spread trades) to 2.1% in the Q2/2019 (Chart 8). This has occurred in both the manufacturing and services sides of the economy, based on the sharp drop in the PMIs (middle panel). Export growth has also slowed, particularly during the recent global manufacturing downturn, leading to sharp declines in business confidence and capital spending plans. The economic weakness was enough to push NZ real GDP growth below the rate of potential GDP - which is estimated by the RBNZ to have fallen from 3% to 2.5% due primarily to slowing population growth related to reduced net immigration into the country. Chart 7NZ Bonds Have Solidly Outperformed Chart 8NZ Growth Should Soon Bottom Out The long slump in NZ manufacturing appears to have ended, however. The manufacturing PMI index jumped 3.8 points to 52.6 in October, with the New Orders component rising 5.3 points to 56.2. This pushed the New Orders-to-Inventories ratio – a leading indicator of overall NZ business sentiment – to the highest level since March 2017 (bottom panel). The domestic side of the NZ economy is also set to improve (Chart 9). Consumer spending has been weighed down by both the structural factor of slowing immigration and the cyclical factor of slowing house prices. Median NZ house price growth has perked up of late, however, in response to the RBNZ’s rate cuts this year, which should help boost consumer spending through wealth effects. Business investment should also start to speed up as manufacturing activity improves, especially with the terms of trade (relative prices of NZ exports to imports) now starting to accelerate (middle panel). The external side of the economy is also set for some improvement. In the November 2019 RBNZ Monetary Policy Statement (MPS) published last week, the central bank laid out a very cautious forecast for an increase in the GDP growth of NZ’s trading partners in 2020 (bottom panel). The sharp pickup in the EM component of our global LEI, however, suggests that global growth, and demand for NZ exports, may be much stronger than the central bank envisions next year. NZ’s economy is running at close to full capacity In the November MPS, the RBNZ also presented its own estimates for spare capacity in the NZ economy, using a variety of economic models for both the output gap and the full employment “NAIRU” (Chart 10). The median estimate of the output gap models is around 0% and is expected to stay around those levels for the next two years. The NZ unemployment rate is projected to be stable around 4% through 2020, which is close to the median model estimate of NAIRU. Thus, by the central bank’s own reckoning, the NZ economy is running at full capacity. Chart 9An Upside Growth Surprise In 2020? Chart 10NZ Does Not Need More Rate Cuts The RBNZ also produces model estimates of the neutral level of its policy rate, the Overnight Cash Rate (OCR). The current OCR of 1.0% is at the low end of the range of model estimates (bottom panel). This seems inconsistent with an economy that may be operating with no spare capacity, as the RBNZ’s other models suggest. Those models appear to be giving an accurate read on the inflationary tendencies of the NZ economy, though. Underlying NZ inflation is accelerating While headline CPI inflation fell to 1.5% in Q3/2019, close to the bottom of the RBNZ’s 1-3% target band, core CPI inflation accelerated to 1.9% - just below the midpoint of the band (Chart 11). The decline in headline inflation can be attributed to weakness in the tradeables component of the CPI, but this should soon start to increase based on the lagged impact of the acceleration of energy prices denominated in NZ dollars (middle panel). With both growth and inflation dynamics now bottoming out in NZ, the RBNZ’s recent rate cuts may be working too well. Meanwhile, non-tradeables (i.e. domestically generated) CPI inflation has accelerated over the past few quarters and is now at 3.2% - above the top end of the RBNZ inflation band. This has occurred alongside an acceleration of average hourly earnings growth to 4.2%, suggesting a tight labor market that confirms the message from the RBNZ’s NAIRU models. NZ monetary conditions are now very easy With both growth and inflation dynamics now bottoming out in NZ, the RBNZ’s recent rate cuts may be working too well. The central bank also produces estimates of the neutral real rate in NZ, using the same “r*” framework used by the US Federal Reserve (Chart 12). The neutral real rate is estimated to be 1.25% which, when added to the 2% midpoint of the RBNZ’s target band, produces a neutral nominal rate of 3.25% - a whopping 225bps above the current OCR rate. Chart 11NZ Inflation Bottoming Out Chart 12NZ Monetary Conditions Now Appear Too Easy With rates so far below neutral in nominal terms, it is no surprise that the NZ dollar is at such low levels versus both the US dollar and the euro (bottom panel). This is providing an additional easing of monetary conditions that will help boost NZ growth and inflation over at least the next year – and likely force the RBNZ to stop cutting rates and, perhaps, even begin to lay the groundwork for taking back some of the 2019 rate reductions. In sum, the combination of improving growth momentum, accelerating inflation dynamics, loose monetary policy settings, and overvaluation make a powerful case for closing out our NZ-US and NZ-Germany spread trades at a healthy profit. NZ yields look too low versus the US and Germany Our fair value regression models for both the 5-year NZ-US spread (Chart 13), and the 5-year NZ-Germany spread (Chart 14), are both signaling that NZ government bonds are relatively expensive. These models estimate the fair value of the spreads as a function of relative central bank policy rates, relative unemployment rates and relative inflation rates. Both models suggest that the cross-country yield spreads have tightened too much relative to the economic fundamentals of NZ, the US and Germany. Chart 13NZ Government Bonds Look Expensive Versus US Treasuries ... Chart 14... And German Government Debt In sum, the combination of improving growth momentum, accelerating inflation dynamics, loose monetary policy settings, and overvaluation make a powerful case for closing out our NZ-US and NZ-Germany spread trades at a healthy profit (see the Tactical Overlay Trade table on Page 16). Bottom Line: The RBNZ is likely done cutting rates, amid signs that the momentum is bottoming for both growth and inflation in New Zealand. Take profits on our long-standing recommended NZ-US and NZ-Germany 5-year government bond spread trades Robert Robis, CFA Chief Fixed Income Strategist rrobis@bcaresearch.com Recommendations The GFIS Recommended Portfolio Vs. The Custom Benchmark Index Duration Regional Allocation Spread Product Tactical Trades Yields & Returns Global Bond Yields Historical Returns

Highlights Duration: The bond market’s bearish trend remains intact, but suffered a hiccup last week as some economic data disappointed. Our sense is that the worst of the global growth slowdown is over, but a rebound in our preferred global growth indicators – Global Manufacturing PMI, US ISM Manufacturing PMI and CRB Raw Industrials index – is necessary to push bond yields higher. We expect that such a rebound will transpire in the coming months. The Credit Cycle & Inflation: Low inflation expectations will keep monetary policy accommodative for the next 6-12 months. This justifies a positive outlook for spread product excess returns. Eventually, inflation will return and force the Fed to adopt a more restrictive stance. This will lead to the end of the credit cycle. We will get more defensive on spread product when long-maturity TIPS breakeven inflation rates move above 2.3%. Municipal Bonds: The main issues facing municipal bonds are long-run in nature, mostly related to underfunded state & local government pensions. These concerns are propping up yield ratios at the long-end of the muni curve, but aren’t likely to cause a wave of ratings downgrades until revenue growth slows during the next downturn. For the time being, investors can grab an attractive after-tax yield premium in long-maturity munis. Hiccups Judging by the bond market, recession fears appear to have peaked in late August. Since then, the Treasury index has lost 2.1% versus a position in cash and the 2/10 yield curve is 23 bps steeper (Chart 1). Curve steepening has also occurred via the real yield curve, while the breakeven inflation curve is moderately flatter, consistent with our expectations.1 However, this bearish bond market trend suffered a set-back last week. The 10-year yield fell 10 bps, back down to 1.84%, and the 2-year yield fell 7 bps to 1.61%. The move was driven by an increase in skepticism about the US and China’s “phase 1” trade deal and some mixed economic data. Both industrial production growth and capacity utilization remain well above their 2016 lows, consistent with stronger PMIs.  October’s Industrial Production report was the worst of last week’s data releases. Production declined 0.8% on the month and capacity utilization fell from 77.5% to 76.7% (Chart 2). The data were significantly influenced by the General Motors strike, but the index still fell 0.5% with motor vehicles and parts stripped out. In our prior discussions of the divergence between “hard” and “soft” economic data, we pointed to relatively strong industrial production as a reason to expect a snapback in depressed manufacturing PMIs.2 This month’s weak print challenges that view, though both industrial production growth and capacity utilization remain well above their 2016 lows, consistent with stronger PMIs. The New York Fed’s Manufacturing PMI also came in roughly flat last week, and continues to point to a rebound in the national index (Chart 2, bottom panel). Chart 1Bumps On The Road ##br##To Higher Yields Chart 2Disappointing Data, But Well ##br##Above 2016 Lows October’s retail sales were also released last week, and we continue to observe a wide divergence between strong consumer spending growth and falling consumer confidence (Chart 3). As with the divergence between industrial production and the manufacturing PMI, we suspect that negative sentiment about the US/China trade war has unduly depressed consumer and business sentiment. Sentiment should rebound if trade tensions ease in the coming months, as we expect. Finally, we note that the CRB Raw Industrials index remains downbeat (Chart 4). We should continue to view the recent increase in bond yields as tenuous until it is confirmed by a rebound in this global growth bellwether. Chart 3Retail Sales Still Strong Chart 4Waiting On The CRB Index To Rebound Bottom Line: The bond market’s bearish trend remains intact, but suffered a hiccup last week as some economic data disappointed. Our sense is that the worst of the global growth slowdown is over, but a rebound in our preferred global growth indicators – Global Manufacturing PMI, US ISM Manufacturing PMI and CRB Raw Industrials index – is necessary to push bond yields higher. We expect that such a rebound will transpire in the coming months.   Inflation Will End The Cycle … But Not Anytime Soon As global growth improves during the next few months and recession fears fade into the background, discussion will once again turn toward questions about how much longer the credit cycle can run, and what will ultimately bring it to an end. On the first question, we find the slope of the yield curve to be an excellent indicator of the age of the cycle. Specifically, we like to split each cycle into three phases based on the slope of the 3-year/10-year yield curve: 3 Phase 1 starts at the end of the last recession and ends when the 3/10 slope flattens to below 50 bps. Phase 2 encompasses the period when the slope is between 0 bps and 50 bps. Phase 3 begins when the 3/10 slope inverts and ends at the start of the next recession. We expect Phase 2 to persist for some time given that inflation expectations remain downbeat. Table 1 shows that corporate bond excess returns are highest in Phase 1, when the yield curve is steep and spreads are tightening quickly. Excess returns tend to remain positive in Phase 2, but are much lower. Excess returns don’t usually turn negative until after the yield curve inverts and we enter Phase 3. Table 1Corporate Bond Performance During The Three Phases Of The Yield Curve Cycle Though some segments of the yield curve inverted in August, we do not think that the cycle has transitioned into Phase 3. The inversion was quite brief, and the measure we employ in our analysis – the monthly average of daily closing values of the 3-year/10-year slope – never broke below zero. The 3-year/10-year slope is currently +23 bps. We expect the current Phase 2 environment to persist for some time, and consequently, corporate bonds will deliver small positive excess returns relative to Treasuries. The reason why we expect Phase 2 to persist for some time is that inflation expectations remain downbeat (Chart 5). Both the 10-year and 5-year/5-year forward TIPS breakeven inflation rates are well below the 2.3%-2.5% range that is consistent with the Fed’s target. This means that the Fed has every incentive to maintain an accommodative monetary policy until inflation expectations are re-anchored. An accommodative policy stance will prevent the yield curve from inverting for any sustained period of time. Chart 5The Re-Anchoring Process Will Take Time The upshot is that a re-anchoring of TIPS breakeven inflation rates will be an important signal for us to get more defensive on corporate credit. When the 10-year and 5-year/5-year forward TIPS breakeven inflation rates move above 2.3%, the Fed will have less incentive to maintain an accommodative stance. The pace of tightening will likely quicken, leading to a sustained curve inversion and a transition into Phase 3 of the cycle. How Long Until Inflation Expectations Are Re-Anchored? Given our framework for thinking about the age of the cycle, the big question for our corporate credit call is: How long until inflation expectations are re-anchored? We have previously demonstrated that inflation expectations adapt to changes in the actual inflation data, and that this adaptive process occurs very slowly.4 Note that our Adaptive Expectations Model puts fair value for the 10-year TIPS breakeven inflation rate at 1.9%. This is above the current rate of 1.63%, but still well below our 2.3%-2.5% target range (Chart 5, bottom panel). The gradual nature of the adaptive process means that actual core inflation will probably have to overshoot the Fed’s 2% target for a period of time before long-dated expectations are firmly re-anchored. With that in mind, we are still a long way away from inflation posing a problem for the credit cycle. Core CPI and core PCE inflation are running at year-over-year rates of 2.3% and 1.7%, respectively, both slightly below levels consistent with the Fed’s target (Chart 6).5 Trimmed mean measures are slightly higher and less volatile. They currently suggest that core inflation will remain in a slow and steady uptrend going forward. Any durable increase in core inflation will likely occur via the Core Services (ex. shelter and medical care) component.  Looking at the main components of core inflation, we see some reason to expect consumer price acceleration to cool in the coming months. Recent inflation gains have come mostly via the Core Goods component (Chart 7). This component tracks non-oil import prices with a long lag, and import prices have already rolled over. Meanwhile, shelter is the largest component of core inflation and we expect it will remain well supported in the coming months. The National Multifamily Housing Council’s Apartment Market Tightness Index has been in “net tightening” territory for two consecutive quarters (Chart 7, bottom panel). An above-50% reading from this index tends to coincide with rising shelter inflation. Chart 6Expect Core Inflation To Rise Slowly Chart 7A Closer Look At The Core CPI Components Ultimately, any durable increase in core inflation will likely occur via the Core Services (ex. shelter and medical care) component. This component has been relatively stable during the past few months (Chart 7, panel 3). Another interesting dynamic to monitor when assessing how long it will take for inflation to return is the labor share of national income. Chart 8 shows that the wage acceleration seen during the past few years has come mostly at the expense of corporate profit margins, and has not yet been significantly passed through to higher consumer prices. This is typical late-cycle behavior, and at some point firms will need to start raising prices in order to protect margins. Chart 8Where Will The Labor Share Peak? If we use the past few cycles as a guide, we see that the labor share of income peaked at above 70%. If this is an accurate road-map for the current cycle, then it means that firms can stomach quite a bit more margin compression, and it could be a long time before inflation pressures emerge. However, some recent research suggests that the labor share of income might peak at a lower level this cycle than in the past.6  This research documents that many industries are increasingly dominated by a small number of “superstar firms”. These firms have greater pricing power and might be able to sustain higher profit margins indefinitely. This would mean that inflationary pressures could re-emerge at a lower labor share of national income than in previous cycles. Bottom Line: Low inflation expectations will keep monetary policy accommodative for the next 6-12 months. This justifies a positive outlook for spread product excess returns. Eventually, inflation will return and force the Fed to adopt a more restrictive stance. This will lead to the end of the credit cycle. We will get more defensive on spread product when long-maturity TIPS breakeven inflation rates move above 2.3%. Strong Revenue Growth Supports Munis We continue to recommend an overweight allocation to municipal bonds due to attractive yield ratios, particularly for long maturities, and steady state & local government revenue growth. Chart 9 shows that Aaa Municipal / Treasury yield ratios were quite low earlier this year, but have increased significantly during the past few months. Yield ratios are above average pre-crisis levels for maturities of 10-years and greater. Against that back-drop of attractive valuations, credit quality trends are also supportive. Municipal bond ratings upgrades are outpacing downgrades (Chart 10), and history suggests that will continue until state & local government revenue growth slows. On that front, the three main sources of state & local government revenue are all growing at strong rates, a trend that should continue as long as the economic recovery is maintained. Municipal bond ratings upgrades are outpacing downgrades, and history suggests that will continue until state & local government revenue growth slows.  Of course, many state & local governments face long-run credit constraints, mostly related to underfunded pension obligations. This is almost certainly the reason why yield ratios for long-maturity bonds are so attractive. Crucially, these long-run issues will not be exposed until revenue growth slows during the next economic downturn, and investors have an opportunity to capture the attractive yield premium in the meantime. Chart 9Great Value At The Long End Chart 10Revenue Growth Will Remain Strong State governments have also made progress shoring up their balance sheets during the past few years. The National Association of State Budget Officers calculates that the overall state & local government total balance has returned back to 2006 levels, while rainy day funds have been built up considerably (Chart 11). Chart 11States Are Growing Rainy Day Funds Bottom Line: The main issues facing municipal bonds are long-run in nature, mostly related to underfunded state & local government pensions. These concerns are propping up yield ratios at the long-end of the muni curve, but aren’t likely to cause a wave of ratings downgrades until revenue growth slows during the next downturn. For the time being, investors can grab an attractive after-tax yield premium in long-maturity munis.   Ryan Swift US Bond Strategist rswift@bcaresearch.com Footnotes 1 Please see US Bond Strategy Weekly Report, “Position For Modest Curve Steepening”, dated October 29, 2019, available at usbs.bcaresearch.com 2Please see US Bond Strategy Weekly Report, “Crisis Of Confidence”, dated October 22, 2019, available at usbs.bcaresearch.com 3 For more details on our analysis of the phases of the cycle based on the slope of the yield curve please see US Bond Strategy Special Report, “2019 Key Views: Implications For US Fixed Income”, dated December 11, 2018, available at usbs.bcaresearch.com 4 Please see US Bond Strategy Weekly Report, “Adaptive Expectations In The TIPS Market”, dated November 20, 2018, available at usbs.bcaresearch.com 5 The Fed targets 2% PCE inflation, which is historically consistent with CPI inflation between 2.4% and 2.5%. 6 https://economics.mit.edu/files/12979 Fixed Income Sector Performance Recommended Portfolio Specification