we see this as an opportunity to adjust exposure for the medium term as we remain cautious on fixed income
US Treasuries closed higher in February on renewed economic concerns, which centred on the housing market as mortgage defaults rose sharply. Weaker than expected data also added to the upward pressure on prices and pushed the yield on the 10-year Treasury down to 4.56%. The German bund closed the month with a modest gain on market expectations that a weaker US economy would impact global growth, which in turn would slow the pace of interest rate increases from the European Central Bank
US treasury yields have again approached 4.5%, some 75 basis points below the cash rate, and at this level bond yields are attractive. For bonds to rally further requires a recession, but we believe the risk of an outright recession is very low. Though we expect global growth to moderate this year, we think it is likely to be mild as we do not expect significant problems in the global economy from either the US housing slow down or industrial activity. Whilst in the short term bond prices could remain strong as investors seek safety, we see this as an opportunity to adjust exposure for the medium term as we remain cautious on fixed income.
Over the month, the yen was supported by better than forecast Japanese Gross Domestic Product, which boosted confidence in the economy. However, despite raising interest rates to 0.5%, the Bank of Japan’s comments that the outlook was for gradual future rises saw the Japanese currency give up some of its earlier gains. Over the month the yen was stronger against the dollar and the US currency also fell against the Euro which was supported by market expectations of an interest rate rise from the European Central Bank in March.
Against the Euro and Sterling, we expect the US dollar to be range bound. But the Yen can continue to strengthen against the US Dollar as the Japanese economy is likely to be hold up in 2007. The low interest rates in Japan have prompted heavy selling of the Yen over the past year and its recent rebound indicates that investors are aggressively buying the currency back. Over the coming months, we will see high volatility in the currency markets. Asian currencies are fundamentally undervalued and we favour Asian currencies against the US Dollar
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