Global Fixed Income Outlook

Explore Our investment Outlook


Sector
U.S. Treasuries


We still have a positive view toward U.S. government securities, largely due to robust demand and an extremely accommodative Fed. Treasury yields have climbed off their record lows of March and remain in positive territory—a notable advantage on the global stage. Most government bond yields in other developed countries are hovering at or below 0%. As more states lift pandemic-related restrictions and the U.S. economy begins to recover, we expect yields to normalize. However, over the next few months, we look for the yield on the 10-year Treasury note to remain near 1.0%.


Sector
U.S. Treasury Inflation-Protected Securities (TIPS)


We expect year-over-year headline and core inflation to remain weak in the near term. However, we expect the massive increase in U.S. debt, a weaker U.S. dollar and onshoring trends among U.S. businesses to push inflation higher in the intermediate term. In our view, market-based measures of longer-term inflation expectations (breakeven rates) don’t adequately reflect this likely increase. Accordingly, we believe TIPS remain attractive.


Sector
U.S. Securitized


High unemployment and the economic effects of pandemic-driven shutdowns have created challenges for certain segments of the mortgage market. We remain cautious toward credit-sensitive securities, including non-agency commercial mortgage-backed securities, and are focusing on high-quality mortgage-backed securities (MBS) and asset-backed bonds. In general, we’re favoring securities the Fed is buying as part of its quantitative easing (QE) plan, including agency MBS. 


Sector
U.S. Investment-Grade Credit


We remain defensively positioned within the sector, given the challenging economic and earnings backdrops and potential for downgrades. In addition to focusing on high-quality corporate bonds, which the Fed continues to support via its QE program, we’re looking for opportunities created by market dislocations. Currently, we believe the utilities, telecommunications and insurance sectors offer attractive opportunities. We’re generally underweighting cyclical sectors, including energy, consumer and industrials.


Sector
U.S. High-Yield Credit


We’re remaining cautious and selective in our positioning and mindful of economic headwinds. We expect continued near-term pressure on credit spreads from growing defaults, downgrades and bankruptcies. Accordingly, we’re maintaining our higher-quality bias and seek to take advantage of select opportunities as they emerge. We’re finding value within the new-issues market and are generally avoiding issuers exposed to a slowdown in travel and leisure activity and those within commodity-related sectors. We expect fundamentals to deteriorate further in those segments. .


Sector
U.S. Municipal


The market’s pandemic-related sell-off led to unprecedented dislocations in the muni market. The Fed quickly stepped in with a plan to purchase select muni securities as part of its QE, and the market generally stabilized. We believe most state and local governments have the financial resources to withstand the current recession. In addition, we expect defaults to remain few and fragmented, with most related to poor management or excessive debt levels. We see opportunity and long-term value among general obligation 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, while select insured bonds and land-secured/development bonds offer value.


Sector
European Sovereign


Our outlook for European sovereigns has improved due to the European Union’s (EU’s) proposed landmark economic recovery fund (750 billion euros or $820 billion). The plan, dubbed “Next Generation EU,” consists of corporate grants and loans financed with unprecedented EU-issued debt backed by member countries’ commitments to the EU budget. If the plan is approved, the EU will issue common debt for the first time in history. Countries hardest hit by the pandemic will receive the most aid, including Italy, Spain and Greece. We don’t expect huge revisions in scale and scope as member nations debate the plan, but we believe the final version may include conditions to the grant and loan components.


Sector
European Credit


Credit markets have rallied from the lows of late March, driven by global central bank support, receding concerns about virus containment, and the resumption of economic activity in several countries. Nevertheless, we believe this recovery in credit spreads is overdone. We expect a more enduring negative impact on the economy until 2022. We also believe weakened financial metrics will pressure spreads through the second-quarter earnings-announcement season.


Sector
Emerging Markets (EM) Debt


EM debt faces the near-term benefits of unprecedented liquidity and prospects for economies reopening in upcoming months. At the same, debt fundamentals have deteriorated significantly, with countries facing low growth and high public debt for years to come. We’re also concerned about the simmering U.S.-China conflict.  We expect EM assets to be rangebound from here. Valuations among high-quality investment-grade EM debt are close to pre-virus levels, but we believe there is still value in below-investment-grade (BB-rated) credits in countries such as Egypt and the Dominican Republic. After significant compression, local rates seem to be hitting a low as policymakers already have significantly loosened monetary policy. Our longer-term bearish view on the U.S. dollar, together with improving trade balances, leads us to favor EM currency positions.



Q3 2020 Investment Outlook Resources

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.

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