Walking, not running, the last mile of inflation

CONTRIBUTORS

Sonal Desai, Ph.D.

Chief Investment Officer,
Portfolio Manager

Nikhil Mohan

Economist
Franklin Templeton Fixed Income

Angelo Formiggini

Economist,
International Research Analyst

Patrick Klein, Ph.D.

Director of Multi-Sector Strategy,
Portfolio Manager
United States

John Beck

Director of Global Fixed Income,
Portfolio Manager
United Kingdom

David Zahn, CFA, FRM

Head of European Fixed Income,
Portfolio Manager
United Kingdom

This publication is a complement to the 2Q24 Franklin Templeton Fixed Income Macro Views.

Executive summary

The US economy shows strength, with a tight job market and solid wage growth, while the European economy remains stagnant. Both the Federal Reserve (Fed) and European Central Bank (ECB) are looking for continued evidence of lower inflation before starting their easing cycle. The Bank of Japan (BoJ) has begun its somewhat delayed process to tighten policy to address increasing inflation and labor costs.

For fixed income spread sectors, we remain cautious of rich valuations, but yields are still attractive to us with risk adjusted carry a focus of our portfolio makeup.

In this issue, we look closely at the following themes and provide our outlooks for fixed income sectors:

Macroeconomic themes

US Fed rate cuts to wait a while longer
Cautious optimism in the euro area
BoJ—a “watchful” adjustment

Portfolio themes

Looking for yield in all the right places
Watch where you step
Reversion back to normal correlations

Special topic—Riding the Waves: Exploring the ripple effect of higher mortgage rates on agency MBS

Agency mortgage-backed securities (MBS) offer what we believe to be attractive income and compelling risk-adjusted returns as prepayment activity is nearly nonexistent given the low incentive for borrowers to refinance at current high mortgage rates.

Read the full paper to learn more.

WHAT ARE THE RISKS?

All investments involve risks, including possible loss of principal.

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.

Asset-backed, mortgage-backed or mortgage-related securities are subject to prepayment and extension risks.

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.

Investments in technology-related industries carry much greater risks of adverse developments and price movements in such industries than investing in a wider variety of industries.

Changes in the credit rating of a bond, or in the credit rating or financial strength of a bond’s issuer, insurer or guarantor, may affect the bond’s value. Low-rated, high-yield bonds are subject to greater price volatility, illiquidity and possibility of default. Floating-rate loans and debt securities are typically rated below investment grade and are subject to greater risk of default, which could result in loss of principal. Any companies and/or case studies referenced herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton.

The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio.

Important Legal Information

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