Independent investment research firm BCA Research recommends cutting corporate bond exposure to underweight as both the European Central Bank and US Federal Reserve Board continue to suggest future rate hikes.

“The Federal Reserve has turned up the volume on its message that inflation expectations must be contained. This increases the likelihood of a Fed overshoot that eventually leads to below-trend economic growth,” BCA says in a research note.

“Also, corporate profits are set to weaken by much more than anticipated due to the energy shock and a looming slowdown in consumer spending growth,” it adds.

“Meanwhile, the ECB is also warming up the markets for a possible rate hike in early 2006. Reduced liquidity and a flatter yield curve would damage euro area spreads,” it notes.

“Our Global Fixed Income Strategy service recommends cutting corporate bond exposure in the U.S. and euro area from neutral to slightly underweight,” it concludes.

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