Bank of America's fixed income and forex team is out with a report detailing its top themes for the year ahead.

1. Long EUR Rates

  • Theme: "Disinflation is well underway" BofA says, suggesting it's time to buy eurozone bonds.
  • Implication: This suggests an expectation of a stable or decreasing interest rate environment in the eurozone, potentially making all investments in EUR attractive, see more on the euro below.

2. Steeper US Curve

  • Theme: Expectation of a steeper yield curve in the US, both in nominal terms and TIPS, as well as compared to EUR and AUD markets.
  • Strategy: Enter 5s30s steepeners, with the middle of the curve (belly) leading gains until the approach of the first rate cut.

3. JPY and GBP Rates Underperformance

  • Theme: They say the anticipated end to the Bank of Japan's yield curve control policy is not reflected in forward pricing. They also say the UK is facing structural inflation issues and pre-election fiscal risks.
  • Outlook: Japanese and British rates may lag behind, widening spreads.

4. Short USD

  • Theme: A weaker USD trend for 2024, driven by technical breakdown, US economic recalibration, China's recovery, and light market positioning.
  • Currencies Focused: Shorting USD particularly against the Euro and South African Rand.

5. Short CNH vs CFETS Basket

  • Theme: China's dependency on relaxed monetary policies leading to trade-weighted Chinese Yuan depreciation in most scenarios; underperformance against higher beta currencies.
  • Focus: Short positions in CNH versus the CFETS (China Foreign Exchange Trade System) basket.

6. Short GBP/AUD

  • Theme: The disparities in fiscal policy, current account, and Net International Investment Position outweigh the minor negative carry.
  • Outlook: A Chinese recovery would further support this position, with technical analysis indicating a head and shoulders top formation on the GBP/AUD chart.
GBPAUD daily chart
GBP/AUD daily

7. Long BBBs vs As, and Long Bank vs Corporate Spreads

  • Theme: Favouring BBB-rated bonds over A-rated, and bank spreads over broader corporate ones, anticipating support from forthcoming rate cuts.

8. Long BRL/MXN

  • Theme: Brazilian Real vs Mexican Peso is seen as attractive due to their valuation, divergence in growth (versus consensus), and improving real rate differential.
  • Outlook: This Relative Value trade is viewed as insulated from global risk dynamics.

9. Value in EM Local Bonds

  • Theme: Post-last Fed hike, Emerging Market local currency bonds tend to yield highly positive returns.
  • Forecast: The highest total returns are expected in local currency bonds in Brazilian Real (BRL), Central and Eastern Europe (CEE), Israeli Shekel (ILS), South Korean Won (KRW), and South African Rand (ZAR), with an approximate 20% return.

The overall theme is a peak in rates, an improvement in China and an overall risk-positive environment.