Despite a flattening of the yield curve and some position squaring of the socalled reflation trade, we believe our key asset allocation themes are still broadly intact after the Fed’s hawkish tilt last week.
In particular, we see renewed curve steepening from here, but focused mainly on the longer end of the curve, and moderate US Dollar weakness
Developments, however, point to a less aggressive view on the end point for the US 10 year Treasury yield, amid a surge of buying from the foreign official sector, as well as the gravitational pull from other core government bond yields.
This should be enough to maintain the reflation trade within equities. Although positioning towards short duration sectors appears stretched and therefore vulnerable to a further near-term unwind, fundamentals remain supportive of medium-term outperformance.