Fixed Income Outlook | Q2 2016

Reading the risk rally

Putnam Investments

Key takeaways

  • We expect the U.S. economy will continue to grow steadily, although we expect inflation may deflect Fed policy from its current dovish path.
  • Negative interest-rate experiments in Japan and Europe have revealed sharp limitations for monetary policy.
  • We believe credit, prepayment, and liquidity risks continue to offer more attractive opportunities than interest-rate risk exposures.

After a surprisingly volatile start to the year, decent fundamentals, dovish policy, and improving risk appetites converged in March, helping to erase some of the market trauma of January and early February. The questions on many investors’ minds, though, is how far the rally in risky assets has to run and what may bring it to an end. We believe fundamentals, policy, and risk appetite will continue to hold the answers.

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