Explore Our investment Outlook
Explore Our investment Outlook
Corporate fundamentals are slowly recovering, balance sheets remain defensive and issuers are taking advantage of attractive refinancing opportunities. This backdrop drives our positive view toward U.S. credit. We favor companies with stable cash flows and improving fundamentals. Additionally, our “vaccine credits” in the travel and leisure industries are benefitting from positive COVID-19 vaccine news. As the economy normalizes in 2021, we expect high-yield securities to outperform investment-grade corporates, as higher-rated issuers have retraced most of their widening from March 2020.
We believe the backdrop for most securitized bonds remains positive, largely due to the robust U.S. housing market and an accommodative Fed. In this environment, we favor higher-yielding credit-sensitive securities, including non-agency collateralized mortgage obligations (CMOs) and collateralized loan obligations (CLOs). We remain cautious toward securities backed by commercial real estate, given changing office and shopping trends in the wake of the pandemic. We also are finding value among asset-backed securities (ABS).
We continue to underweight nominal U.S. Treasuries, which we believe will remain rangebound amid the Fed’s lower-for-longer interest rate policy. However, we believe Treasury inflation-protected securities (TIPS) remain attractive. Breakeven rates remain below historical averages and, in our view, don’t reflect mounting longer-term inflationary pressures. Specifically, we believe the massive increase in U.S. debt, a weaker U.S. dollar and onshoring trends among U.S. businesses ultimately will drive inflation much higher.
The prospects of higher taxes and increased federal government spending under a Biden administration should generally boost demand for tax-advantaged municipal bonds (munis). We see specific opportunities in general obligation (GO) bonds of municipalities with strong balance sheets, ample reserves and high pension funding ratios. We also believe essential service revenue bonds (water/sewer, public power) offer important defensive characteristics. Among credit-sensitive munis, we believe spread levels continue to indicate value.
We have a neutral position in European credit. A weak regional economic outlook, new coronavirus lockdown measures and global trade uncertainties are diminishing the effectiveness of quantitative easing on risk assets. The combination of fair valuations and negative yields is also weighing on our sentiment. But we are finding value among select financial bonds and industrial hybrid securities. We also have exposure to semi-core and peripheral European sovereigns, which should benefit from sustained central bank stimulus.
We believe the best EM debt opportunities are in local rates securities in countries where yield curves are steep and inflation is low. Our largest positions are in South Africa, Peru, Mexico and Indonesia. We are more cautious toward external sovereigns due to valuation concerns, particularly in investment-grade countries.
Our outlook toward EM corporate debt is turning more positive because the worst of the pandemic is likely behind us. Although the potential for downgrades and defaults has declined, our positions tend to be idiosyncratic and driven by specific valuation opportunities. With inflation pressures building and COVID-19 vaccines arriving, we favor select positions in commodity companies and higher-yielding companies across the ratings spectrum.
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.
No offer of any security is made hereby. This material is provided for informational purposes only and does not constitute a recommendation of any investment strategy or product described herein. This material is directed to professional/institutional clients only and should not be relied upon by retail investors or the public. The content of this document has not been reviewed by any regulatory authority.
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