Preview
Global Market Outlook
- Inflation globally continues to move in a direction that markets are comfortable with while growth has moderated, allowing central bankers in the developed world to embark on a rate-cutting cycle.
- Investors continue to grapple with the direction of global economies as the debate intensifies over the relative strength of the US versus growth expectations for Europe and Asia. Despite the debate, the global economy appears to be normalizing from the dislocations experienced in the post-2020 landscape.
- US elections and Chinese policy responses will drive much of the story as we look forward to the balance of 2024 and will set the tone for 2025. Given the unexpected turns to date, one should not be surprised by the unexpected.
Developed market rates
Few indicators have been as accurate in predicting interest rates as oil prices. During the quarter, oil prices reached a three-year low, with sovereign yields following the same downward trajectory. We expect this relationships between oil prices and yields to continue. While the high yield index has produced impressive year-to-date returns, we see no reason for the asset class to stop here. While we anticipate some moderation in US growth, we remain constructive and expect high yield to continue its positive momentum. US IG spreads are near their tights for the year, while European IG spreads are closer to their median. With much of this dispersion now priced in and a potentially more accommodative European Central Bank (ECB) compared with the Federal Reserve (Fed), total returns in European IG credit may outperform US IG credit. Securitized spreads have generally converged to fair value in wake of the Fed's interest rate cut. Some sectors still offer value, but we are mindful of risks. We remain constructive on segments of CRT, CLO, ABS, and CMBS ex office. Chinese policymakers were reluctant to embrace aggressive demand stimulus measures. That changed toward the end of September, with coordinated announcements. This development should be bullish for emerging markets sensitive to global growth and bearish for USD more broadly.
High yield
While the high yield index has produced impressive year-to-date returns, we see no reason for the asset class to stop here. While we anticipate some moderation in US growth, we remain constructive and expect high yield to continue its positive momentum.
Investment grade
US IG spreads are near their tights for the year, while European IG spreads are closer to their median. With much of this dispersion now priced in and a potentially more accommodative European Central Bank (ECB) compared with the Federal Reserve (Fed), total returns in European IG credit may outperform US IG credit.
Securitized products
Securitized spreads have generally converged to fair value in wake of the Fed's interest rate cut. Some sectors still offer value, but we are mindful of risks. We remain constructive on segments of CRT, CLO, ABS, and CMBS ex office.
Emerging markets
Chinese policymakers were reluctant to embrace aggressive demand stimulus measures. That changed toward the end of September, with coordinated announcements. This development should be bullish for emerging markets sensitive to global growth and bearish for USD more broadly.
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 obligation (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.
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.
Sovereign debt securities are subject to various risks in addition to those relating to debt securities and foreign securities generally, including, but not limited to, the risk that a governmental entity may be unwilling or unable to pay interest and repay principal on its sovereign debt. To the extent a strategy focuses on particular countries, regions, industries, sectors or types of investment from time to time, it may be subject to greater risks of adverse developments in such areas of focus than a strategy that invests in a wider variety of countries, regions, industries, sectors or investments.
The government’s participation in the economy is still high and, therefore, investments in China will be subject to larger regulatory risk levels compared to many other countries.