Nonetheless, we expect that inflation will resume its gradual downward trend to allow the ECB and Fed to cut rates this summer. Stock and credit markets are priced for perfection, but we do not fully sympathize with current valuations, as weaknesses in many economies remain. Indeed, even though it’s firmly risk-on, downside risk are not fully gone. We added to curve steepeners and prefer highly rated SSAs and covered bonds over investment grade and high yield credit.

In our previous outlook ‘Staying Power’ we argued that markets were catching up with our ‘there is value in bonds’ view. Nonetheless, we mentioned that fundamentals would be important for retaining positive sentiment in the bond market. In the US, the economy has been defying the slowdown seen in Europe and China, supported by vigorous consumption, fiscal support and a slow feed-through of higher interest rates. Europe remains in economic stagnation, but the robust labor market keeps it afloat.

We acknowledge that recession risks appear to have eased for now, but we do not fully embrace the growth euphoria. Economic weaknesses remain and geopolitical events, such as the European elections this spring and the US presidential elections in November, loom. In our base case we expect the Fed and ECB to cut this summer.