Securitized Products

A near-term rally in risk assets now appears very likely. But we expect it to be cut short when the Fed eventually reacts to easier financial conditions by returning to a more hawkish policy stance. Investors should maintain a defensive portfolio allocation on a 6-12 month horizon, and remain overweight TIPS versus nominal Treasuries.

Spread product performance has been foreshadowing changes in market rate hike expectations since early last year, and the recent bout of weakness means it is probably time for the Fed to temper its hawkishness.