Report Industry Investment Rating - The investment rating for the US dollar bond industry is "Underperform the Market" [1][4] Core Viewpoints - US employment data continues to cool, with weak employment growth and a rising unemployment rate. In November, non - farm payrolls increased by about 64,000, and the unemployment rate rose unexpectedly to 4.6%, the highest since September 2021. In October, non - farm data weakened significantly, with a decrease of 105,000 jobs [1] - Inflation data unexpectedly cooled. The US CPI in November rose 2.7% year - on - year, and the core CPI rose only 2.6% year - on - year, the lowest since 2021, providing room for interest rate cut expectations next year [2] - The US GDP in the third quarter grew at an annualized quarterly rate of 4.3%, the fastest in two years, mainly driven by consumer and business spending resilience and more stable trade policies [2] - In the US dollar bond market, it is recommended to prioritize defense. Corely allocate medium - and short - duration investment - grade bonds (5 - 7 - year investment - grade bonds currently have a yield of about 4.3%) and moderately allocate TIPS while keeping low allocations for long - duration varieties over 10 years [3] Summary by Related Catalogs 1. US Macro - economy and Liquidity - Employment: US employment data shows a cooling trend. In November, non - farm payrolls increased slightly, and the unemployment rate reached a new high. In October, non - farm data was significantly weak, affected by the sharp reduction in federal government employment [1] - Inflation: The US CPI and core CPI in November showed significant cooling, providing room for future monetary policy adjustments and interest rate cut expectations next year [2] - GDP: The US GDP in the third quarter grew at an annualized quarterly rate of 4.3%, the fastest in two years, with strong consumer and business spending [2] 2. Exchange Rate - The report presents multiple figures related to non - US currency trends, Sino - US sovereign bond spreads, and the relationship between the US dollar index and other indicators, but no specific analysis content about exchange rates is provided [50][55][57] 3. Chinese - funded US Dollar Bonds - The report shows figures such as the return trends of Chinese - funded US dollar bonds since 2023 (by level and industry), the yield and spread trends of investment - grade and high - yield Chinese - funded US dollar bonds, and the returns in the past two weeks (by level and industry), but no specific analysis content is provided [63][65][67] 4. Rating Actions - In the past two weeks, the three major international rating agencies took 16 rating actions on Chinese - funded US dollar bond issuers, including 2 rating revocations, 6 rating upgrades, 5 rating downgrades, and 3 initial ratings. Specific rating actions for each issuer are listed in the table [71][72]

Economic Outlook - JP Morgan Asset Management anticipates a resilient U.S. economic expansion in 2026, characterized by a K-shaped recovery where wealthier households and capital-rich corporations thrive, while middle-income consumers and rate-sensitive sectors like housing struggle [1] - The firm projects real GDP growth to be above 3% in the first half of 2026, tapering to approximately 1% to 2% later in the year, with inflation expected to rise towards 4% year-over-year before decreasing to 2% by year-end [1] Interest Rates and Market Strategy - The bank maintains a conservative outlook on interest rate cuts, predicting a "more patient" Federal Reserve due to persistent inflation around 3% and tariff impacts, with 2-year Treasuries expected to yield between 3.5% and 3.75% and 10-year yields in the 4.0% to 4.5% range [2] - Market participants are advised to focus on duration rather than direction, emphasizing income in fixed income investments tied to strong corporate, consumer, and municipal balance sheets [3] Investment Themes - JP Morgan identifies four structural themes for investors to consider: 1. **Tariffs**: Increased U.S. tariffs are generating over USD 29 billion in monthly revenue, with expectations that costs will be passed to consumers, temporarily raising inflation [8] 2. **Immigration Policy**: A decline in net immigration may lead to a contraction in the working-age population, stabilizing unemployment but limiting job growth and long-term GDP [8] 3. **AI Investment**: Projected data-center and AI capital expenditures are expected to reach approximately USD 588 billion in 2026, representing about 1.2% to 1.3% of U.S. GDP, with AI being a key driver of earnings strength [8] 4. **Global Focus on Shareholder Returns**: An increasing emphasis on buybacks and higher dividends is becoming more prevalent globally, as Europe and Asia adopt policies similar to those in the U.S. [10] Global Market Dynamics - International equities outperformed U.S. equities by about 1,520 basis points in 2025, with potential for further catch-up as the U.S. dollar remains 10% over its fair value and the U.S. equity premium over international markets stands at 34% [5] - The U.S. accounts for over 65% of global benchmarks and 40% of domestic market capitalization in just 10 companies, suggesting a gradual rotation towards select value and international markets while maintaining exposure to AI leaders [6]

Economic Outlook - The potential end of the government shutdown is expected to boost economic activity, leading to a slight increase in yields [2][3] - The 10-year benchmark yield is currently at 4.10%, reflecting market reactions to the shutdown developments [3] Market Dynamics - The market is experiencing a push-pull scenario with fluctuations in yields between 4.08% and 4.16% due to mixed economic data and varying comments from the Federal Reserve [4] - There is caution regarding early data points post-shutdown, as they may be incomplete and require careful interpretation [4] Federal Reserve Policy - The expectation is that the Federal Reserve will not initiate rate cuts in December, with decisions likely pushed to the first quarter of the following year [5][6] - Inflation remains around 3%, leading the Fed to seek more confidence in a downward trend before considering further rate cuts [5] Credit Market Opportunities - Credit markets are characterized by tight spreads, with low yields compared to treasuries, but the fundamentals for investment-grade bonds remain strong [7][8] - Intermediate-term bonds and Treasury Inflation-Protected Securities (TIPS) are recommended for their potential positive real returns [8][9] Investment Recommendations - Mortgage-backed securities are highlighted for their government backing and higher yields compared to treasuries [9] - Municipal bonds are favored for investors in high tax brackets due to attractive tax-equivalent yields and generally high credit quality [10]

Core Insights - Research indicates that Treasury Inflation-Protected Securities (TIPS) yield the best returns when purchased during periods of low inflation [1] Group 1 - TIPS are designed to protect investors from inflation by adjusting the principal value based on changes in the Consumer Price Index (CPI) [1] - The performance of TIPS is closely linked to the inflation rate at the time of investment, with lower inflation rates leading to higher relative returns [1] - Historical data suggests that entering TIPS investments during low inflation periods can maximize potential gains for investors [1]

Core Insights - The article discusses strategies for building inflation-protected income similar to a government pension, emphasizing the importance of inflation protection in retirement planning Group 1: Social Security Benefits - Clients can receive Social Security benefits that are inflation-adjusted, with a 66-year-old client potentially receiving $22,267 annually now or 32% more if they wait four years, which translates to an additional $7,125 of inflation-protected income for life [1] Group 2: TIPS Ladder - TIPS (Treasury Inflation-Protected Securities) are recommended as a way to create a 30-year cash flow that pays an inflation-adjusted average of $43,800 annually, with the current yield at 4.55% [2] - A TIPS ladder provides a virtually guaranteed cash flow, making stock market volatility less concerning, and can serve as a 30-year inflation-adjusted annuity [2] - TIPS offer a non-spousal survivor benefit for heirs, unlike Social Security [2] Group 3: Gap Years in TIPS - TIPS cash flow is not a monthly paycheck and includes interest payments, maturing bonds, and accumulated interest from inflation, with a gap in cash flow from 2036 to 2039 that requires purchasing additional bonds maturing in 2035 and 2040 [3]

Core Viewpoint - Investors are betting on a potential interest rate cut by the Federal Reserve, but rising inflation poses a significant obstacle to this expectation [1][2][4] Group 1: Inflation and Economic Indicators - The upcoming July Consumer Price Index (CPI) is expected to show a core inflation rate rise to 3%, the highest level since February [1] - There are concerns that trade policy adjustments may lead to increased commodity inflation, which could delay the Fed's decision to cut rates [1] - Recent reports from major financial institutions highlight stagflation as a significant concern, with high inflation coexisting with weak economic growth [2] Group 2: Market Reactions and Predictions - Bond investors are actively positioning for a 25 basis point rate cut at the Fed's September meeting, with some preparing for a potential 50 basis point cut if inflation data supports it [2] - The market is currently pricing in two rate cuts by the end of the year, with the first expected in September [4] - The demand for U.S. Treasury bonds has weakened ahead of the CPI report, leading to an increase in bond yields [2] Group 3: Federal Reserve's Stance - Fed Chairman Jerome Powell has indicated the need for more time to assess the impact of tariffs before making a rate cut, despite pressure from President Trump [4] - The Fed's dual mandate of achieving full employment and price stability is becoming increasingly conflicted due to rising inflation [3][5] - The labor market's signs of weakness are leading to increased expectations for a rate cut in September [5]

Group 1 - Morgan Stanley emphasizes the importance of CPI data integrity for the $2.1 trillion TIPS market, expecting July inflation rates to remain above the Federal Reserve's target despite political pressures [1] - The Bloomberg U.S. Treasury Inflation-Protected Securities Index has risen by 5.7% this year, indicating increased demand for inflation-protected assets [1] - The U.S. Treasury plans to increase TIPS issuance to meet debt financing needs [1] Group 2 - Mitsubishi UFJ analysts note that ASEAN and India will face significant U.S. tariff increases starting in early August, potentially altering the current economic landscape [1] - The Indian rupee remains stable, while the Indian stock market has declined by 0.2%, with expectations of more accommodative monetary policy from the Reserve Bank of India in response to U.S. tariff impacts [1] Group 3 - Bloomberg Economic Research indicates that the Eurozone economy is performing well, leading the European Central Bank to hold off on easing monetary policy, with no expected rate cut in September [2] - The ECB's next action is anticipated in December, potentially lowering the deposit rate to 1.75% [2] Group 4 - Goldman Sachs reports significant downward revisions to U.S. non-farm payroll data for May and June, indicating a more severe labor market weakness than previously expected, which may prompt adjustments in Federal Reserve monetary policy [2] - The total downward revision for non-farm payrolls for May and June is 258,000, the largest two-month revision since 1968 [2] Group 5 - Nomura Securities suggests that the likelihood of two rate cuts by the end of December has significantly increased following the release of July non-farm data, with rising demand for hedging against potential economic hard landing risks [3] - Danish Bank analysts state that the Swiss franc's performance depends on the outcome of U.S.-Swiss trade negotiations, with potential high tariffs on Swiss exports if no agreement is reached [3]

Investment Rating - The report maintains a neutral stance on the tactical USD 5y5y model despite the underperformance of energy markets, indicating a cautious approach to investment in this area [7][21]. Core Insights - The report highlights a significant underperformance of US breakevens relative to oil strength, attributed to weak CPI figures and labor market data, as well as skepticism regarding the persistence of oil price movements [3][11]. - The FOMC's dovish reaction function is expected to positively influence TIPS breakevens, with projections indicating a marginal increase in unemployment while allowing inflation to overshoot [3][7]. - The report suggests that breakevens often overshoot fundamental values during periods of oil volatility, presenting potential trading opportunities, particularly in fading large oil-driven moves [5][13][22]. Summary by Sections US Market - Breakeven rates are recommended to be long, particularly in the 5-year area, as they are perceived to be undervalued due to tariff passthrough underpricing [7][8]. - Real rates are also recommended to be long, especially in the 30-year segment, where support has returned above 2.5% [7]. Euro Area - Breakevens are viewed as slightly cheap to fair value but lack compelling support, particularly in the long end [7]. - The report suggests that steepeners across the curve may be a better expression than outright positions [7]. UK Market - The report recommends a short position on the 10-year RPI, while suggesting a long position on the long end of the curve [7][8]. - The UK inflation performance is noted as strong, but the report indicates that it may be overpriced [4].