Allianz Investment: Inclined to adopt a short-term strategy for US Treasury bonds, inflation risks remain.

Allianz Investment says that the trend of easing inflation in the Eurozone continues. The European Central Bank reduced interest rates by 25 basis points to 3.25% in October, in line with the market's expectations. At the same time, their comments leaned towards a dovish stance, with some market participants expecting a 50 basis point rate cut in December. This seems somewhat stretched at the moment, but it cannot be ruled out that the European Central Bank will cut rates multiple times. The impact of policy on short-term interest rates may provide support for the yield curve to steepen further. Allianz Investment leans towards adopting short-term strategies for US Treasury securities, as they should trade within a wider range - as long as US economic data continues to remain stable and the risk of reflation due to (under the leadership of the Trump administration) trade protectionism intensifies. The longer end of the Euro yield curve is easily influenced by complex market dynamics (national fiscal policies and global economics). Allianz Investment sees potential in investments in portfolios where the yield curve steepens, including in Germany and the US. Additionally, as yields have increased recently, from a strategic allocation perspective, duration risk and fixed income overall are becoming more attractive. Compared to German government bonds and others, UK government bonds stand out in terms of relative value. In terms of credit, companies are gradually reporting their third-quarter earnings. In investment grade credit, utilities performed well in the third quarter, followed by financials and then industrials. The decline in asset values has slowed down, driving the ongoing recovery in real estate. However, cyclical consumer goods lag behind, with the European markets showing significant weakness, leading several companies in the automotive and retail (especially luxury goods) sectors to revise their guidance or issue profit warnings. Allianz Investment believes that investment grade credit is currently trading at fair value, as the market is reassessing the strong fundamentals of most industries and reducing concerns about future growth, improving the value of Eurozone debt. The advantages of a high interest rate environment, along with relatively better valuations in the industrial sector, continue to favor the financial industry. Additionally, companies in the utilities sector regulated by the US and their defensive characteristics are also favored. In the high yield sector, the performance of third-quarter USD bonds exceeded that of Euro bonds, with CCC-rated and underperforming credit bonds leading other rated bonds. The primary market remains active, with an ideal issuance schedule ahead. Although maintaining an overall risk exposure close to benchmark levels, Allianz Investment expects industries like telecommunications, leisure, and banks to outperform energy (affected by falling oil prices), automotive, and media sectors. Default rate expectations are relatively mild, spreads are narrowing, but absolute yield levels are still attractive. Year-to-date, Asia high yield USD credit continues to significantly outperform other credit markets. According to the J.P. Morgan Asia Credit Index (JACI) non-investment grade index, the total return is 16.05% (see fixed income market performance chart), and China's introduction of more stimulus measures undoubtedly helped. Compared to years ago, the Asian high yield bond market is now more diversified, with China accounting for 25% of the JACI market value compared to about 50% in 2021, and the real estate sector in China accounting for less than 10%, down from 35% previously. Consumer goods, finance, and utilities currently make up half of the index. In other spread asset classes, Allianz Investment is optimistic about external sovereign debt in emerging markets, as funds are flowing back into this asset class. Some countries have performed significantly better since the beginning of the year compared to others, including Ecuador, Egypt, Pakistan, Lebanon, and Ukraine, of which Allianz Investment holds a higher proportion. Several debt restructuring has been completed this year, including some projects stalled due to the COVID-19 pandemic. Allianz Investment believes that there will not be any major credit events in 2025, as large amounts of maturing bonds are mainly concentrated in issuers supported by the IMF program.