Credit, what else?

A lot has happened since this time last year. Overall, we have underestimated U.S. growth momentum so far this year. At least temporarily, tax cuts and spending increases have produced a bigger effect than we had initially thought. We also underestimated the potential for Fed action, following the change of leadership. By contrast, European growth has been slower than we expected. We were late in understanding the market consequences of Italy's changing political landscape and did not foresee the speed and extent of the spread widening in emerging-market bonds. On the plus side, our out-of-consensus currency call of 1.15 dollars per euro proved spot on.

As we head into the fall, our outlook remains broadly intact. We remain strongly in favor of the short to medium end of the U.S. Treasury curve. We expect 2-year Treasuries to deliver a total return of approximately 2.8%, which looks quite attractive on a risk- adjusted basis, particularly since we expect the dollar to trade sideways. That said, we remain constructive on corporate credit and see selective opportunities in emerging markets.