We expect higher yields to dampen the rally in “risky” assets

We continue to forecast that a strong recovery in the global economy and ongoing policy support will drive further increases in developed market (DM) and emerging market (EM) equities over the next couple of years. But given our view that the yields of 10-year government bonds in most DMs will rise from here, especially in the US, we suspect that the gains in equities will be small, and fairly similar across both DMs and EMs. Rising 10-year yields would probably also limit the upside for other “risky” assets. For example, we now think that DM corporate bonds will tread water, although the prospects for the high-yield segment are generally better in our view. We have also downgraded our forecasts for EM dollar-denominated sovereign and corporate bonds.