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Greater economic uncertainty means markets will likely be more volatile this year as the expansion winds down. An insight report from L.A.-based Capital Group says to expect decreasing investor confidence, including in credit.

Changing expectations about the path of U.S. monetary policy as economic data change will add to late-cycle volatility, says the report. Further, the Fed’s changing balance sheet matters.

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“Quantitative easing was an experiment; quantitative tightening is also an experiment,” says John Smet, fixed income portfolio manager at Capital Group, in the report. “We think it’s going to lead to more volatility, and riskier parts of the bond market doing poorly.”

In a weekly market insight report, New York–based BlackRock also suggests caution, despite market jitters recently being soothed by a more dovish Fed, a Chinese government that has signalled easier credit and fiscal conditions, and optimism for a U.S.-China trade deal.

Caution is warranted because “late cycles have come with higher volatility in the last three decades,” the BlackRock report says. Also, “near-term consensus expectations for economic and earnings growth still appear high, even though we view the risk of a 2019 U.S. recession as low.”

Further, geopolitical risks are a persistent force in markets, and asset valuations aren’t compelling, it says.

As such, the firm suggests a balanced investment approach. That includes taking risks where they’re sufficiently rewarded. Bonds offer “slightly” higher returns and “significantly” greater diversification benefits than in 2018, says the report. However, the firm prefers equity over credit, and emerging markets over developed markets outside of the U.S.

Capital Group likewise suggests investors avoid significant risk for incremental additional return. With high yield earning some of the highest returns in fixed income over recent years, spreads are tight—at levels where subsequent high-yield returns tend to underperform Treasurys historically, it says. For example, when high-yield spreads have been in their tightest quartile, Treasurys have returned 4% more, on average, over the following two years, the report shows.

It also notes that high yield tends to be highly correlated to equities and can be a meaningful source of portfolio volatility. Further, investors should be on the lookout for unintentional credit risk in their core fixed income allocations.

“Unfortunately, some core bond funds have prioritized boosting income over diversification and preservation,” the report says. “‘Reaching for yield’ often entails heavy investment in high yield.”

The firm also suggests investors diversify portfolio income. One option for those looking to complement corporate high yield is investment-grade emerging markets debt, with its relatively lower correlations to equities and higher credit quality.

A caveat is that investors must accept a greater interest-rate risk with investment-grade emerging markets debt, as measured by duration. “But if you don’t expect interest rates to go through the roof, this area of the bond market could be worth exploring,” the report says.

Whether rates will go through the roof or not is discussed in National Bank’s February fixed income report. The Montreal-based bank describes the risks, such as global trade tensions, to its baseline economic forecast as “significant,” and provides two outlooks for fixed income returns based on both bearish and bullish scenarios.

In a bearish scenario where Canada’s growth slows and the central bank cuts the overnight rate to 0.75%, credit spreads widen to levels comparable to those of early 2016. In that scenario, the Canadian bond market would generate a total return of 5.45%, says National Bank, with mid and long provincial and corporate bonds underperforming comparable Canadian government bonds.

In the bullish scenario, growth accelerates to 2.1%, with inflation rising toward 2% faster than expected, and the central bank raises its key rate five times in the next 18 months. Total return of the Canadian bond market would be −3.53%.

Within the bank’s base case scenario, in which there are two rate hikes in 2019, total return of the Canadian bond market is forecasted at −0.76% this year.

From the Fed, National Bank expects one rate hike in 2019, in September, and the 10-year Treasury ending the year at about 3.34%.

If U.S. economic growth is lower, say, closer to 1.5% than to the bank’s base case scenario of 2.3%, then the 10-year Treasury could end the year closer to 2.25%, it says. That slower growth could result from ongoing trade tensions and other unresolved policy issues.

For more details, read the full reports from Capital Group, BlackRock and National Bank, which includes forecasted rates.