Central banks—Will inflation stay, or will it go?

CONTRIBUTORS

Sonal Desai, Ph.D.

Chief Investment Officer,
Portfolio Manager

Nikhil Mohan

Economist
Franklin Templeton Fixed Income

Angelo Formiggini

Economist,
International Research Analyst

Patrick Klein, Ph.D.

Director of Multi-Sector Strategy,
Portfolio Manager
United States

John Beck

Director of Global Fixed Income,
Portfolio Manager
United Kingdom

David Zahn, CFA, FRM

Head of European Fixed Income,
Portfolio Manager
United Kingdom

This publication is a complement to the 3Q24 Franklin Templeton Fixed Income Macro Views.

Executive summary

Central-bank action remains paramount for investors. The European Central Bank (ECB) has already embarked on its monetary policy loosening. Incoming US economic data has been a bit softer and is starting to show a cooling—likely welcome news for the US Federal Reserve (Fed) as it gives it more space to commence on an easing cycle. However, we feel this next rate-cutting cycle will be shorter and shallower than the market expects.

Although spreads in some sectors reached near 20-year lows, an allocation to fixed income continues to make sense given the high yields and income provided by high-quality, short-maturity securities.

In this issue, we look closely at the following themes and provide our outlooks for fixed income sectors:

Portfolio themes

Technical tailwinds: Fixed income markets are enjoying strong technicals.
Stay nimble, stay quick: Although volatility in the US Treasury market has trended lower, it remains well above historical averages, calling for us to take a more tactical approach with our duration positioning.
Look for lagging sectors: Rising tides do not necessarily raise all boats. There are sectors that have not fully participated in the strong returns seen year-to-date.

Read the to learn more.

WHAT ARE THE RISKS?

All investments involve risks, including possible loss of principal.

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. Low-rated, high-yield bonds are subject to greater price volatility, illiquidity and possibility of default. Floating-rate loans and debt securities are typically rated below investment grade and are subject to greater risk of default, which could result in loss of principal. Asset-backed, mortgage-backed or mortgage-related securities are subject to prepayment and extension risks.

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. To the extent the portfolio invests in a concentration of certain securities, regions or industries, it is subject to increased volatility.

Important Legal Information

This document is for information only and does not constitute investment advice or a recommendation and was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. This document may not be reproduced, distributed or published without prior written permission from Franklin Templeton.

Any research and analysis contained in this document has been procured by Franklin Templeton for its own purposes and may be acted upon in that connection and, as such, is provided to you incidentally. Although information has been obtained from sources that Franklin Templeton believes to be reliable, no guarantee can be given as to its accuracy and such information may be incomplete or condensed and may be subject to change at any time without notice. Any views expressed are the views of the fund manager as of the date of this document and do not constitute investment advice. The underlying assumptions and these views are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole.

There is no assurance that any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets will be realized. Franklin Templeton accepts no liability whatsoever for any direct or indirect consequential loss arising from the use of any information, opinion or estimate herein.

The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested. Past performance is not necessarily indicative nor a guarantee of future performance.

CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.