A spike in oil prices is the biggest threat to global economic growth and the capital markets as a whole, said Jack Malvey, chief fixed-income strategist at Lehman Brothers. "If [oil] were to gradually drift from $60 to $70, that's not an automatic trip wire. But if there were a $10 price spike, that could have linear effects," he noted, adding he is not expecting oil to move below $50 a barrel over the next six months. It briefly closed about the $60 threshold last week before dropping a couple dollars lower by the middle of the week.
Malvey, the top-ranked researcher for general strategy in last year's Institutional Investor All-America Fixed-Income Research Team, expects the Federal Reserve will raise short-term rates to 3.75% and the 10-year Treasury to yield around 4.60% by year-end.
Malvey tempered his predictions by saying exogenous factors, such as what he perceives is a real estate bubble, could alter these levels. "Before we forecast, let's pay homage to the uncertainty list, so if we're wrong, we can blame it on one of these," he quipped, also referring to other potential X-factors such as terrorism, Asian currency reevaluation and U.S. tax reform.
In terms of sector performance, Malvey expects asset-backed securities will continue to steadily outperform the rest of the bond market. He recommends a 100% overweight to the asset class. He is wary of emerging market paper on the view elections in several Latin American countries next year could cause political instability and roil markets.
