Inflation, and the complacency of the market around the lack thereof, is among the top trends we are watching in 2018. The demand for U.S. debt is also on the list as an underappreciated factor. The search for yield that has driven investors from Europe, Japan, and elsewhere into U.S. markets could start to abate, creating a strong technical force for Treasurys.
Of course, we cannot ignore Washington. The tax bill provided some hope for Republicans for changing course on what was looking like a near-certain loss in the midterms. The full effects of the tax changes, however, remain to be seen; as these effects come to light, we expect both unexpected benefits and disappointments to emerge. Even without knowing the net effect of the tax bill, that dynamic alone can create investment opportunities, especially for active managers.
In addition to the tax changes, we see opportunity around deregulation, an area we have been bullish on since last year. The Treasury reports released at the end of 2017 support this view, and implementation of those recommendations could bring upside in areas that suffered under unnecessary post-crisis regulation.
FIVE KEY MACRO THEMES TO WATCH IN THE YEAR AHEAD
- Threats surrounding the “Goldilocks” economic environment
- The emergence of inflation
- U.S. Treasury market “tourists” looking to return home
- Tax changes becoming reality—bringing both unexpected benefits and disappointments
- Deregulation starting to materialize