Fixed Income: A Shallower Cycle

By Tony Brennan, Chief Investment Strategist

With central banks in developed economies still broadly on track to achieve relatively soft landings, labour markets are in many cases still at close to full employment, certainly in Australia and the US. As well as potentially contributing to the “last mile” in bringing inflation back to targets being more drawn out, being at around full employment is also likely to limit the prospective pick-up in growth that can occur without inflation increasing again, all of which might restrict the extent to which interest rates can be cut by central banks. Further fiscal stimulus, ahead of a Federal election in Australia and after one in the US, and other potentially inflationary policies in the US, could further limit interest rate reductions and even require interest rate rises again in time, and consistent with these considerations, we are altering our recommended fixed income strategy from overweight fixed rate bonds and underweight floating rate securities back to a more neutral stance on both.

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