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General Account

MIM's Market Strategy team overweights U.S. investment grade and residential whole loans, underweights cash

The note says a September policy-rate increase looks likely and rests its growth call on AI infrastructure spending and consumer spending.

The Market Strategy team's portfolio posture, published in Insurance AUM Journal, is to take its carry from better-quality credit. The favored sectors are the ones where the all-in yield and the underlying fundamentals still pay for the risk being taken; the sectors being stepped back from are the thinly spread parts of the market where rate sensitivity and convexity leave the downside lopsided. U.S. investment grade, in both public and private form, emerging-market sovereigns, residential whole loans and agricultural mortgages sit on the first list. German Bunds, Japanese government bonds, European investment grade, CMBS, flow ABS and cash sit on the second.

Underneath that allocation sits a macro call with a date attached. The team expects 2026 growth in the United States to outpace the growth of 2025 and to continue into 2027. Inflation, in its reading, is likely to stay elevated for another few quarters, and policymaker patience is wearing thin. Enough so that the note writes a Federal Reserve increase in the policy rate in September as likely, while conceding in the same passage that the increase is unlikely to have any impact on inflation and that it does increase the risk to the growth outlook.

Read the two halves together and the position reads as a bet that credit spreads will pay for a policy path the team expects to be unhelpful. Growth stays above trend, inflation stays sticky, a September increase looks likely and the risk to growth rises with it, and the answer is more carry from better-quality risk rather than less risk. That holds together only if the yields on the overweight list are wide enough to absorb some growth disappointment. The published extract does not put a number on the cushion those yields provide.

Growth that hangs on the AI trade

Two components carry the growth forecast. The first is investment in artificial-intelligence infrastructure; the second is consumer spending, which the team treats as likely an indirect result of the first. The mechanism it names is a technology-driven equity wealth effect, offsetting weak consumer sentiment and expectations of negative real income growth in every income cohort. Housing, meanwhile, is still subtracting from activity, which is why the note calls the AI trade the hinge on which growth rests. The dependency runs one way. If household spending sits downstream of AI capital spending, a slowdown in the investment removes the support under the consumption numbers. That is inference, but the note's own framing invites it, and the growth forecast the allocation leans on is built that way.

The August employment report is read as consistent with that picture. Hiring improved off a soft patch and broadened across several sectors, manufacturing and construction held steady, wage growth continued to moderate, and a longer work week supported household income; the shift from part-time to full-time employment was encouraging. The team is careful about the level, noting that job creation remains modest by historical standards. Broader indicators describe a low-fire, low-hire market, with unemployment contained, participation improved and longer job searches pointing to reduced dynamism. The team reads that as enough to sustain spending without renewing wage pressure.

Europe supplies the other half of the rate story. Euro-area growth proved more resilient than the first-quarter soft patch implied: output contracted in the first three months and rebounded in the second, a sequence the team credits for keeping MIM's 0.9% forecast for 2026, above consensus by its own account, intact. The published extract ends mid-sentence on how the growth mix breaks down across countries.

An underweight list that includes cash

Set side by side, the two lists mark where the team thinks the compensation sits. Each overweight is a spread it expects to be paid for holding; each underweight is a spread too thin to cover the rate and convexity risk inside the asset. Cash lands on the second list despite carrying no spread to lose, and for a general account that is the entry with operational consequences. An underweight to cash reads as a thinner liquidity buffer, and the posture only works while the spread assets keep paying and can be sold when claims arrive.

The euro-area pairing deserves a second look. The team keeps an above-consensus growth forecast for the region intact and still underweights European investment grade, which suggests the objection is the spread, not the economy: resilience in the growth data is not the same thing as compensation in the yield. A U.S. investment grade overweight beside a European investment grade underweight puts part of the quality filter in the geography rather than in the credit.

The place to press the note is where it leans hardest on its own forecast. Growth rests on an equity wealth effect holding up against weak sentiment and negative real income expectations in every cohort, which is asset-price support for consumption rather than income support. A policy-rate increase that the team expects to raise the risk to growth while leaving inflation untouched is the kind of event that tests support of that kind, and the September decision is where the test begins.

An underweight to cash reads as a thinner liquidity buffer, and the posture only works while the spread assets keep paying and can be sold when claims arrive.
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Insurance AUM Journal
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