For 2020, we expect global growth to remain resilient on the back of steady US growth, improving domestic conditions in the eurozone and an acceleration in emerging market (EM) growth momentum. Sustained monetary policy accommodation by the Fed and ECB intended to truncate downside growth risks and engineer a pick-up in inflation momentum, combined with receding fears over Brexit and US-China trade tensions, should serve to buoy global financial market sentiment, especially in a period of mounting geopolitical risk. Ultimately, a benign global macro backdrop is favorable for spread sectors and suggests further outperformance versus developed market (DM) government bonds as we move further into the New Year. Here we provide a summary of the key drivers behind our global outlook, how we’re positioned in broad market portfolios and a more detailed description of where we see value across global fixed-income markets.

The Big Picture

Developed Market Rates: Relative Value by Region

CANADA: The Canadian yield curve is trading through money market rates, reflecting downside risks. However, this will limit interest in Canadian fixed-income and likely cap returns. Longer-dated bonds do not look as attractive as they had earlier; however, they still offer value relative to the US.
US: We don’t expect any Fed hikes until realized inflation is above the Fed’s 2% target on a sustained basis. We will maintain a long duration position with diversified exposure across the UST curve which can also act as ballast against spread risk.
UK: Should the UK and EU reach some form of agreement on Brexit, we expect higher gilt yields and a stronger GBP. Although the UK election outcome is market friendly in the near term, the gilt curve could steepen as fiscal spending needs related to Brexit materialize.
EUROPE: We view the ECB’s asset purchase program as driving further yield compression. That said, the lower intensity (at €20 billion per month) implies that the downward pull for bond yields is less strong than in previous iterations. As the growth picture is improving on the margin, we still view global bonds as overvalued.
JAPAN: We expect a steeper yield curve especially in the super-long end as the BoJ is likely to reduce JGB purchases.
AUSTRALIA: We are actively managing duration given unresolved external risks. We are maintaining curve flattening positions as ballast to our overweight credit position and rotating between high-grade sectors of semi-government, supranational, sovereigns and agencies; we currently favor semi-governments.
See Relative Value by Sector section for the Emerging Markets outlook.
US We expect 2019 US growth to come in between 2.0%-2.25%. “Soft data” indicators suggest manufacturing weakness, but the hard data on the factory sector indicate this weakness to have occurred early in 2019, with a distinct stabilization or improvement in factory indicators lately. We expect this better factory tone to continue in 2020 and project 2020 growth to be around 2.0%.
Canada The economy is bumping against capacity constraints while risks to US trade should diminish. The business cycle is likely to extend further with inflation around target, keeping Bank of Canada policy rates on hold.  Policy will still be more reactive on negative surprises, but these are likely to be exogenous shocks.
Europe For 2020, we continue to see a moderate growth rebound in the eurozone overall, mainly driven by somewhat better outcomes in Germany and Italy. We believe that the hurdle for the ECB to cut further has increased since last quarter and is now quite high as the economy seems to be through the worst and the Fed may have stopped easing. That said, a rate cut is still more likely than a hike for the ECB (but neither is in our near-term baseline).
UK We expect a Brexit "deal" to occur in 1Q20 in light of the substantial majority the Conservatives won at the elections. In terms of growth outlook, this implies a reduction of uncertainty that should bolster investment in 2020 and we are in the process of revising our growth outlook up to around 1.5%. We expect the Bank of England to start hiking next year at a very measured pace.
Japan We maintain a constructive view on the Japanese economy, driven by consumer spending, business investment and potential fiscal stimulus. Negative effects of a consumption tax increase are expected to be limited. On monetary policy, we expect the BoJ to maintain its accommodative policy for some time to meet its 2% inflation goal. No further easing is our base case scenario.
Australia Government spending and exports contributed heavily to growth in 2019, but we believe consumer activity will step up going forward. Confidence has improved on recovery in housing prices and disposable income. Government plans for fiscal stimulus remain on hold. Another RBA cash rate cut has to be considered in 1H20, but we believe that QE won’t be required and see little benefit from such a strategy.

Relative Value by Sector