Preview
Global market outlook
- With the start of the easing cycle this year for most developed market central banks, the macro environment is generally favorable for bonds. As the world heals from the pandemic and monetary and fiscal policy normalizes, investors continue to assess the probability of various outcomes from a hard-landing to no-landing scenarios.
- China does not appear to be following previous responses to financial crisis, which may weigh on global growth. The National People's Congress just put forth its plan that continues it near-term focus on internal goals.
- Corporations remain disciplined with their balance sheets and fourth quarter earnings generally met expectations. Spreads have come in, but yields still offer some value. We prefer short-dated credits and are being selective, looking to take additional risk on an individual, idiosyncratic basis where opportunities arise.
Developed markets: Growth differentials amongst developed market economies have been high in recent quarters. Thus far, these gaps have not equated to large dispersion in bond returns. If this growth divergence continues, it should create alpha-generating opportunities.
High Yield: We continue to favor allocations in the high yield space as macroeconomic data supports a stronger U.S. growth story. Earnings, employment, and production all reflect a strong underlying economy. While credit spreads have tightened considerably over the last six months, we feel all-in yields justify holding positions.
Investment Grade: IG spreads tightened during the last quarter while treasury yields sold off, making curve location important. Looking at bond breakevens, the spread widening needed to wipe out total return, and one can now see compelling yield cushion at the short end of the curve compared with the long end.
Emerging Markets: In local-currency markets, we see high nominal and real yields in Latin America where yields remain historically wide to the index. EM hard currency also offers attractive yields, particularly amongst high yield credit. We will continue to monitor the policy responses from developed market central banks and China policy.
Securitized Products: Resiliency in home prices, household balance sheets, and the solid job market are supportive for securitized bonds. Agency mortgage-backed securities, seasoned credit risk transfer notes and certain segments of structured credit offer attractive opportunities.
Read the for our perspectives on performance and opportunities for global fixed income markets by segment.
Definitions
"AAA" and "AA" (high credit quality) and "A" and "BBB" (medium credit quality) are considered investment grade. Credit ratings for bonds below these designations ("BB," "B," "CCC," etc.) are considered low credit quality, and are commonly referred to as "junk bonds."
An Asset-Backed Security (ABS) is a financial security backed by a loan, lease or receivables against assets other than real estate and mortgage-backed securities.
A basis point (bps) is one one-hundredth of one percentage point (1/100% or 0.01%).
Pioneered by Freddie Mac in 2013, credit risk transfer (CRT) programs structure mortgage credit risk into securities and (re)insurance offerings, transferring credit risk exposure from US taxpayers to private capital.
Commercial Mortgage-Backed Securities (CMBS) are a type of mortgage-backed security that is secured by the loan on a commercial property.
A Mortgage-Backed Security (MBS) is a type of asset-backed security that is secured by a mortgage or collection of mortgages.
Effective duration (sometimes called option-adjusted duration “OAD”) is the duration for a bond with an embedded option when the value is calculated to include the expected change in cash flow caused by changes in market interest rates.
The option-adjusted spread (OAS) is the measurement of the spread of a fixed-income security rate and the risk-free rate of return, which is then adjusted to take into account an embedded option.
The ICE BAML U.S. Corporate Index tracks the performance of U.S. dollar-denominated investment grade corporate debt publicly issued in the U.S. domestic market. Qualifying securities must have an investment grade rating (based on an average of Moody’s, S&P, and Fitch), at least 18 months to final maturity at the time of issuance, at least one year remaining term to final maturity as of the rebalancing date, a fixed coupon schedule, and a minimum amount outstanding of $250 million.
The ICE BAML US Corporate BB Index, is a subset of the ICE BofA US High Yield Master II Index tracking the performance of US dollar denominated below investment grade rated corporate debt publicly issued in the US domestic market.
The ICE BAML U.S. Fixed Rate CMBS Index tracks the performance of U.S. dollar-denominated investment grade fixed rate commercial mortgage-backed securities publicly issued in the U.S. domestic market.
The MOVE index, or Merrill Lynch Option Volatility Estimate Index, is a crucial gauge of interest rate volatility in the U.S. Treasury market.
The JPM EM Volatility Index follows aggregate volatility in currencies through a turnover-weighted index of G7 and emerging market volatility, based on three-month at-the-money forward options.
The Bloomberg US Corporate High Yield Bond Index measures the USD-denominated, high yield, fixed-rate corporate bond market.
A hard landing occurs when the economy contracts sharply due to the central bank's efforts to control inflation.
A no-landing occurs when the economy continues to grow despite a series of contractionary monetary policies.
A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality but differing maturity dates.
Yield to Worst (YTW) is a financial metric that helps investors assess the minimum yield they can expect from a bond under various scenarios.
A subprime auto loan is a type of loan used to finance a car purchase offered to people with low credit scores or limited credit histories.
Fannie Mae Guaranteed Agency Mortgage Pools are pools of securitized residential mortgage loans that are issued and guaranteed by Fannie Mae.
The Citi Inflation Surprise Index measures price surprises relative to market expectations. A positive reading means that inflation has been higher than expected and a negative reading means that inflation has been lower than expected.
A diffusion index measures how many stocks are advancing within an index, typically on a daily time frame. Exhibit 7 is a diffusion index that uses Taylor rule models to forecast monetary policy in the following emerging markets: Brazil, Chile, Colombia, Czech Republic, India, Indonesia, Israel, Hungary, Malaysia, Mexico, Poland, South Africa, South Africa, South Korea, and Thailand.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal. Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges. Past performance is no guarantee of future results.
Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls. Changes in the credit rating of a bond, or in the credit rating or financial strength of a bond’s issuer, insurer or guarantor, may affect the bond’s value. International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.
US Treasuries are direct debt obligations issued and backed by the “full faith and credit” of the US government. The US government guarantees the principal and interest payments on US Treasuries when the securities are held to maturity. Unlike US Treasuries, debt securities issued by the federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the US government. Even when the US government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the market value of these securities.