Preview
Global market outlook
- Political risks have quickly escalated as elections around the globe (US, UK, France, Mexico) have come into focus, creating greater volatility across risk assets. The impact of these elections will be felt over the balance of the year and into 2025.
- Global economies continue to power forward albeit with some questions arising around the strength and breadth of the underlying growth, with investors continuing to debate the probability of various outcomes from a hard landing to no-landing scenarios.
- Guidance for the second half of the year from CEOs will be informative in understanding the strength of the economic recovery with respect to profit margins and labor markets. Globally, investors will look to China’s policy response coming out of the Third Plenum, the third plenary session of the Central Committee of the Communist Party of China.
Developed markets: When determining value for bond investors, the real yield measure is paramount. The positive news for bond investors is that current real yields are a lot more attractive versus their historical average levels in multiple developed markets.
High yield: We expect the attractive yield and dollar price, strong fundamentals, and favorable supply-demand dynamics to continue to lead to reasonable returns in the high yield markets. We recommend staying in shorter maturities and higher-quality issuers within the space.
Investment grade: Recent underperformance in single A’s has driven the BBB/A spread to multi-year tights. This, plus an inverted yield curve and a high breakeven in the short-end, makes higher quality IG (single A) more attractive, especially as investors now focus on all-in yield over spread.
Emerging markets: US inflation persistence early in the year led to higher rates, a stronger dollar, and volatility in Fed pricing, impacting local-currency emerging markets. Mexican elections and fiscal concerns across some countries is also weighing on markets. Forward real yields look attractive in select markets.
Securitized products: Securitized spreads still have room to tighten despite the rally thus far. We see attractive value opportunities in credit risk transfers (CRT), collateralized loan obligations (CLO), agency mortgage-backed securities (MBS), and asset-backed securities (ABS) with high all-in yields backed by solid credit fundamentals and favorable market technicals.
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."
A Mortgage-Backed Security (MBS) is a type of asset-backed security that is secured by a mortgage or collection of mortgages.
A collateralized loan obligations (CLO) is a security backed by a pool of debt, often low-rated corporate loans.
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.
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.
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.