Cold winter weather provides some inspiration for the lead theme for the 2018 fixed income outlook: fuel for (over)heating. The heat of global economic acceleration may lead to this narrative gaining traction in 2018, with significant implications for the global rates outlook. Fiscal stimulus in the U.S. from tax reform and potential spending increases represent an upside risk to the room to run theme from our '2018 Global Investment Outlook' released in December.
Both cases support further policy normalisation from the Federal Reserve. We see higher rates as the likely result, but potentially with a greater impact out the curve than in past years. Our fixed income asset views for 2018 centre on strategies to limit the costs in a rising-rate environment of providing diversification for broad portfolios. This means an up-in-quality stance, with bonds serving as portfolio shock absorbers, and equities the primary focus of risk taking.