Janus Henderson: ​Yellen’s dovish tone rallies markets

Fed Chairwoman Janet Yellen’s message in her semi-annual testimony on Capitol Hill was largely consistent with market expectations. She remained consistent in her message that additional tightening this year is appropriate despite the recent inflationary weakness. Her overall tone was taken as dovish, which resulted in both equities and interest rates rallying.

We remain confident that the Federal Open Market Committee (FOMC) will be sidelined for the balance of the year given Brexit concerns, European banking volatility, slower growth in Asian markets, geopolitical risks and little progress in Trump’s economic plans.

Within short duration income, we see increased opportunity outside the US.

In global bond markets, Australian and New Zealand rates appear more attractive versus the rest of the world. We expect the Reserve Bank of Australia (RBA) to remain on hold for the remainder of 2017. Housing and labour markets will remain key factors in future growth and inflation expectations and we expect the RBA will await further data before acting. We continue to hold a positive view on investment-grade credit in Australia, largely due to attractive real yields and the healthiness of issuers compared to other developed markets.

Additionally, we see value in systemically-important, highly-rated Asian issuers such as government-related energy, telecom and banking entities and in the US, the ‘too-big-to-fail’ banks, whose bonds should be supported by an increasingly robust regulatory environment focused on less risk taking and greater capital requirements. We expect corporate profitability to remain strong, aided by less regulation and lower taxes.

In Europe, we find little value given the low and negative yield environment.

As for the central bank in the US, we believe rates will underperform the rest of the world as the US recovery continues.