Explore Our investment Outlook
Explore Our investment Outlook
We continue to emphasize sectors and companies that have stable cash flows and are positioned to benefit from the economic recovery. This includes securities issued by utilities, real estate investment trusts (REITs), finance companies and life insurance firms. Although credit spreads remain tight, we believe the U.S. credit market still offers some spread-tightening potential, particularly among lower-credit-quality securities. In our view, improving economic growth and supportive Fed policy remain positive influences on corporate bond valuations. And while rising Treasury yields may pressure investment-grade credit spreads, we expect to add exposure on any material spread widening.
Within the securitized sector, our outlook favors collateralized loan obligations (CLOs) and non-agency collateralized mortgage obligations (CMOs). We believe these securities offer higher-quality structures and yield advantages relative to agency mortgage-backed securities (MBS), which we believe are richly valued. In addition, given our favorable view of the U.S. housing market, we believe securities backed by residential housing, such as single-family rentals, offer value. We have little commercial mortgage-back securities (CMBS) exposure, as our outlook for the sector remains cautious due to changing business models and commercial real estate usage.
Improving economic growth and aggressive fiscal and monetary support should keep Treasury yields on the rise. We expect the benchmark 10-year Treasury yield to settle near 1.75% later in the year. In this environment, we are underweighting nominal Treasuries, but we believe TIPS (Treasury Inflation-Protected Securities) remain attractive. While current inflation remains below Fed targets, breakeven rates continue to rise on growing long-term inflation expectations. In addition to improving growth, we expect soaring U.S. debt, a weaker U.S. dollar and corporate onshoring trends to drive inflation higher, highlighting the value in TIPS.
We expect Biden administration plans for higher taxes and increased federal spending, including aid to struggling states, to drive continued demand for tax-advantaged munis. We believe general obligation (GO) bonds of municipalities with strong balance sheets, ample reserves and high pension funding ratios offer attractive opportunities. We also believe essential service revenue bonds (water/sewer, public power) provide important defensive characteristics. Among credit-sensitive munis, spread levels continue to indicate value, in our view.
With improving growth prospects pushing government bond yields higher, we have an underweight position in core European government bonds. We favor exposure to peripheral European sovereigns, which should benefit from sustained ECB and European Union aid. We also have an overweight position in European inflation-linked securities, given the inflationary effects of improving growth and current fiscal and monetary policy. We have a neutral position in European credit, but we’re skewed to an overweight in higher spread and more volatile subordinated financial bonds and select industrial hybrid securities.
We continue to favor local rates and currency positions over external securities, largely due to valuation concerns and expectations for continued U.S. dollar weakness. We prefer Asian currencies, given better growth prospects in Asia versus other EM regions. We are also emphasizing commodity-linked currencies, particularly those poised to benefit from rising metals prices. Among local bonds, we prefer countries with higher risk/reward potential, including South Africa and Indonesia. We are rotating our U.S. dollar duration into Chinese government bonds, which trade similarly to Treasuries but offer higher yields. Among external securities, we believe high-yield countries offer better value than investment-grade countries.
Positive fundamental drivers, including better growth in EM economies, rising commodity prices and loose monetary policy, should bode well for EM assets. We believe select corporate positions provide higher spread opportunities over existing sovereigns. We favor Mexico, where we own bonds from commodity-related companies we believe will benefit from rising silver and copper prices. However, we are concerned about recent increases in rates and will monitor the situation.
References to specific securities are for illustrative purposes only, and are not intended as recommendations to purchase or sell securities. Opinions and estimates offered constitute our judgment and, along with other portfolio data, are subject to change without notice.
International investing involves special risk considerations, including economic and political conditions, inflation rates and currency fluctuations.
Alternative mutual funds that hold a variety of non-traditional investments also often employ more complex trading strategies than traditional mutual funds. Each of these different alternative asset classes and investment strategies have unique risks making them more suitable for investors with an above average tolerance for risk.
Diversification does not assure a profit nor does it protect against loss of principal.
Past performance is no guarantee of future results. Investment returns will fluctuate and it is possible to lose money.
Mutual fund investing involves market risk. Investment return and fund share value will fluctuate. It is possible to lose money by investing in mutual funds.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.
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