Executive Summary
- In the US, we expect inflation to be well below Fed targets by late 2024, resulting in more Fed easing than is currently expected.
- In Europe, a mild growth contraction and additional declines in core inflation should allow the European Central Bank to loosen policy in 2Q24.
- In the UK, downside growth risks support our view that the market is still underestimating the degree of rates cuts that the Bank of England is likely to deliver.
- In China, we maintain our view that moderating growth and inflation should keep Chinese interest rates at current low levels for longer.
Global growth continues to downshift, led by Europe, the UK and China. In the US, we anticipate growth will slow further, but still avoid a recession. On the inflation front, weaker demand for manufacturing and services across a number of countries and deflationary pressures in China are easing price pressures globally. These trends, coupled with the accumulating effects of monetary tightening by the major central banks, should further dampen global economic growth and inflation which, in turn, should lead to lower developed market (DM) government bond yields and a modestly weaker US dollar. This macro backdrop is supportive for emerging markets (EMs), particularly in Latin America, which we expect to outperform. Other spread sectors such as high-yield, bank loans and select areas of the mortgage-backed securities (MBS) space offer attractive yield, but we acknowledge their vulnerability to unanticipated shifts in central bank policy, macro-related sentiment and unanticipated geopolitical developments. Lingering concerns over a “higher-for-longer” rate environment—driven by factors such as stronger-than-expected growth in the US, increased US Treasury (UST) supply to cover a growing fiscal deficit and inflation remaining above respective central bank targets—may also lead to episodes of heightened market volatility.
| US: Decelerating Inflation Should Drive More Fed Easing |
|
US economic growth improved in 2023, almost solely due to a rebound in construction activity. Consumer spending has been credited with improving the economy in 2023. However, the fact is that consumer spending on services grew no faster in 2023 than in 2022, and the improvement in consumer spending on goods was fully offset by declines in inventory investment. Market sentiment is optimistic about construction staying strong in 2024. Our view is that non-residential construction likely will slow as the stimulus from federal government programs fades, and we think residential construction could also be prone to renewed declines as inventories of unsold new homes remain very high and as higher mortgage rates and higher home prices take their toll on demand. Nominal spending growth has continued to decelerate reasonably steadily, and we believe that deceleration will put further downward pressure on inflation in 2024. We expect inflation to be well below Fed targets by late 2024. These trends should drive more Fed easing than is currently expected. |
| China: Support Still Necessary, But No Big Turnaround |
|
Our base case for China includes continued slow growth and increasing deflationary pressure, which will likely be exported globally. While the longer-term shift away from property to new engines of growth in new energy, advanced manufacturing and modern infrastructure still lends some optimism, the country’s near-term challenges remain given the drag from housing market headwinds and other structural challenges. Also, policymakers’ focus on increasing supply rather than demand will exert downward pressure on global prices. China’s GDP deflator has turned negative, underscoring mounting deflationary risks on the back of insufficient demand. While policymakers are intent on bolstering confidence, overall sentiment continues to be weak and there remains a chance of more targeted moves to support growth, including cutting policy rates and enacting more business-friendly policies. |
| Euro Area: Disinflation Well Underway |
|
Growth in the eurozone remains under pressure. Policy rates are historically tight, squeezing credit flows to both households and corporations, which are negative in most countries bar France and particularly weak in the periphery. Forward-looking surveys still point toward stagnation or mild contraction but have stabilised at low levels more recently. The construction outlook in Germany is particularly weak. The pressure on the eurozone chemicals industry from higher energy prices persists and the auto sector is facing renewed pressure from Chinese imports. However, the labor market has only seen a very gradual weakening and in conjunction with positive real income growth has supported consumption, mainly in the services sector. In December, the European Central Bank (ECB) kept rates steady at 4%, highlighting good progress in disinflation and forecasting headline inflation to fall below the 2% target in 2026. Hawkish ECB members notably have softened their tone recently. That said, rate cuts have not been discussed and we feel that members are still concerned with upside inflation risks. As core inflation continues to fall and more moderate spring wage growth details are announced, confidence in inflation’s return to target will build, allowing policy to be loosened in 2Q24. In the UK, more recent inflation prints have come in noticeably below economists’ forecasts, and those of the Bank of England (BoE), after surprising to the upside earlier in 2023. This faster-than-expected return toward target inflation led the market to reassess the likelihood of further monetary policy tightening and focus has shifted to anticipate deeper and earlier interest rate cuts. Meanwhile, growth has remained lackluster as the economy contracted in 3Q23 and the month of October. We expect the trend of broadly flat growth to continue into 2024, with risks skewed to the downside given continued lagged effects from previous policy tightening. While wage growth has remained stubbornly high, as the labor market continues to loosen and consumer price inflation continues to recede we expect fears over persistent wage price pressures to abate. Against this backdrop, we believe that the market is still underestimating the degree of rates cuts that the BoE is likely to deliver. |
|
US: Decelerating Inflation Should Drive More Fed Easing
 |
We expect inflation to be well below Fed targets by late 2024.
US economic growth improved in 2023, almost solely due to a rebound in construction activity. Consumer spending has been credited with improving the economy in 2023. However, the fact is that consumer spending on services grew no faster in 2023 than in 2022, and the improvement in consumer spending on goods was fully offset by declines in inventory investment. Market sentiment is optimistic about construction staying strong in 2024. Our view is that non-residential construction likely will slow as the stimulus from federal government programs fades, and we think residential construction could also be prone to renewed declines as inventories of unsold new homes remain very high and as higher mortgage rates and higher home prices take their toll on demand. Nominal spending growth has continued to decelerate reasonably steadily, and we believe that deceleration will put further downward pressure on inflation in 2024. We expect inflation to be well below Fed targets by late 2024. These trends should drive more Fed easing than is currently expected. |
|
China: Support Still Necessary, But No Big Turnaround
 |
China’s GDP deflator has turned negative, underscoring mounting deflationary risks on the back of insufficient demand.
Our base case for China includes continued slow growth and increasing deflationary pressure, which will likely be exported globally. While the longer-term shift away from property to new engines of growth in new energy, advanced manufacturing and modern infrastructure still lends some optimism, the country’s near-term challenges remain given the drag from housing market headwinds and other structural challenges. Also, policymakers’ focus on increasing supply rather than demand will exert downward pressure on global prices. China’s GDP deflator has turned negative, underscoring mounting deflationary risks on the back of insufficient demand. While policymakers are intent on bolstering confidence, overall sentiment continues to be weak and there remains a chance of more targeted moves to support growth, including cutting policy rates and enacting more business-friendly policies. |
|
Euro Area: Disinflation Well Underway
 |
Hawkish ECB members notably have softened their tone recently.
Growth in the eurozone remains under pressure. Policy rates are historically tight, squeezing credit flows to both households and corporations, which are negative in most countries bar France and particularly weak in the periphery. Forward-looking surveys still point toward stagnation or mild contraction but have stabilised at low levels more recently. The construction outlook in Germany is particularly weak. The pressure on the eurozone chemicals industry from higher energy prices persists and the auto sector is facing renewed pressure from Chinese imports. However, the labor market has only seen a very gradual weakening and in conjunction with positive real income growth has supported consumption, mainly in the services sector. In December, the European Central Bank (ECB) kept rates steady at 4%, highlighting good progress in disinflation and forecasting headline inflation to fall below the 2% target in 2026. Hawkish ECB members notably have softened their tone recently. That said, rate cuts have not been discussed and we feel that members are still concerned with upside inflation risks. As core inflation continues to fall and more moderate spring wage growth details are announced, confidence in inflation’s return to target will build, allowing policy to be loosened in 2Q24. In the UK, more recent inflation prints have come in noticeably below economists’ forecasts, and those of the Bank of England (BoE), after surprising to the upside earlier in 2023. This faster-than-expected return toward target inflation led the market to reassess the likelihood of further monetary policy tightening and focus has shifted to anticipate deeper and earlier interest rate cuts. Meanwhile, growth has remained lackluster as the economy contracted in 3Q23 and the month of October. We expect the trend of broadly flat growth to continue into 2024, with risks skewed to the downside given continued lagged effects from previous policy tightening. While wage growth has remained stubbornly high, as the labor market continues to loosen and consumer price inflation continues to recede we expect fears over persistent wage price pressures to abate. Against this backdrop, we believe that the market is still underestimating the degree of rates cuts that the BoE is likely to deliver. |
Global Market Rates: Relative Value by Region
| US | US growth should slow further through 2024, while inflation is already at the Fed’s target on a six-month annualized rate basis. Restrictive monetary policy will allow further labor market rebalancing even as policy rates decline. Risks to our benign base case remain to the downside. |
| Canada | The Canadian economy has stagnated so the Bank of Canada (BoC) may initiate rate cuts before the Fed. This is despite higher wage growth and lower productivity than is consistent with 2% inflation in the long-run. With actual inflation resuming its downtrend, the BoC will rely on increasing slack in the manufacturing sector to lead the disinflation process. |
| Europe | ECB policy has reached a level that ECB policymakers believe will bring inflation to target over their forecast horizon. Further falling in core inflation and softer wage data will build confidence in that pathway. Economic activity remains lackluster. Weak growth and inflation closing in on target does not require policy rates at 4.00%. |
| UK | Forward-looking indicators suggest that economic activity will remain subdued at best as previous tightening gains traction and the labor market loosens further. We expect the recent slowing of inflation to continue, heading back toward target. |
| China | We expect 2024 growth to come in between 5.0% and 5.5%, with policymakers focused on economic recovery. We do not expect broad-based growth stimulus; rather, we anticipate continued, targeted measures. |
| Japan | Given the positive development of growth and inflation, we believe that the Bank of Japan (BoJ) remains open to making further policy adjustments such as the size of its balance sheet and the removal of negative interest rates. However, the end of negative interest rates does not suggest the start of a hiking cycle. |
| Australia | Consumer resilience is expected to fade as the full effects of policy-tightening take hold. Although the heavy lifting by the Reserve Bank of Australia (RBA) is done, the borrowing rate conversion, cost of living increases, contracting real incomes and declining savings will all work to curtail discretionary spending into 2024. That said, with unemployment expected to remain relatively low and immigration unchanged, it remains likely to create a scenario of only a mild recession or one averted. |
Relative Value by Sector
| Investment-Grade (IG) Corporate Credit |
| US |
| Outlook Balance sheets remain robust enough to weather the widely forecasted slower economic backdrop. While corporate managements have largely behaved conservatively given macro-related uncertainty, we are cautious about the potential for increasing bondholder unfriendly M&A activity. |
| Relative Value +/- Spreads are already pricing in a soft landing and, as such, do not offer much cushion against negative surprises. When weighed against a positive technical backdrop, we prefer to stay closer to home at this time. |
| Europe |
| Outlook Investment-grade corporate fundamentals are holding up relatively well despite a soft growth picture. Bank earnings have been strong and we continue to find value in the sector. Demand for credit continues to be robust despite the ECB stepping away in 2024. |
| Relative Value +/- Spreads performed well in 4Q23 and are slightly tight to historical average levels. Healthy demand for fixed-income may support these tighter levels, but we may find better entry points. |
| Australia |
| Outlook Fundamentals still remain sound despite the prospect of the economy slowing. We remain focused on issuers that can manage sticky inflation pressures and are defensive in nature. Fortunately, due to the monopolistic or duopolistic nature of many issuers in Australia, they naturally have these characteristics and many of the regulated assets are also protected by price resets. |
| Relative Value + We remain overweight credit, particularly short-dated holdings, with a preference for select REITs and utility/infrastructure assets that have regulated resets. We also favor senior unsecured major bank and foreign national champion bank issuance. |
| High-Yield (HY) Corporate Credit |
| US |
| Outlook High-yield credit spreads are fair to relatively attractive. Yields may offer attractive returns in excess of defaults, which are likely to remain near or below historical averages given the higher credit quality of the market on average. Technicals may remain supportive as higher yields have attracted institutional and fund buyers while issuance has been moderate. |
| Relative Value + We continue to see opportunity in service-related sectors that are still recovering from the Covid-led recession (i.e., reopening trades including airlines, cruise lines and lodging) and potential rising stars. We are more cautious on consumer products, retailers and home construction. |
| Europe |
| Outlook Corporate fundamentals are generally okay given recent earnings. We see some weakness in cyclical sectors given the slow European growth environment. We expect supply to increase in 1Q24, with a higher quality bias and with a continued focus on refinancing. We also expect net issuance to remain low. |
| Relative Value +/- Sector spreads appear vulnerable after narrowing in 4Q23 through the five-year average. We prefer short-dated yield-to-call opportunities, remain selective on the new-issue calendar with a BB/B focus and remain cautious on certain cyclical sectors (chemicals, building materials, packaging). |
| Bank Loans |
| US |
| Outlook Bank loan spreads are relatively attractive. While fundamentals have declined given higher rates and slower growth, current yields are providing ample cushion for higher defaults. Valuations have improved, and technicals may soon improve as demand for discounted floating-rate loans from CLOs may exceed moderate new-issue supply. |
| Relative Value + We believe outperformance will come from credit selection and avoiding problem credits. We are focused on select names where fundamentals remain intact and prices are at discounts to their call price. |
| Collateralized Loan Obligations (CLOs) |
| US |
| Outlook Improvements in CLO arbitrage or reduction of broader macro volatility are likely to be met with CLO issuance, keeping spreads range-bound in the near-term. Hedging costs for some overseas investors remain elevated, but high-quality CLO debt still offers attractive yields with limited credit risk. |
| Relative Value + We view investment-grade-rated CLO debt at current levels as very attractive and retain our view that it should continue to perform well in either bullish or bearish bank-loan-spread environments given strong structural protections. |
| Mortgage and Consumer Credit |
| Agency MBS |
| Outlook Agency MBS presently offers strong fundamentals with current spreads at attractive levels and prepayment risk structurally low. Diminishing Fed and bank demand coupled with increased volatility remain headwinds but present investment opportunities. |
| Relative Value + We favor 30- and 20-year versus 15-year MBS, focusing on security selection to enhance yield and convexity profiles. |
| Non-Agency Residential MBS (NARMBS) |
| Outlook Declining mortgage rates, easing inflation and rising consumer confidence are buoying US housing affordability. In the near-term, national home prices are expected to remain constrained as they move toward long-run average increases of 3%-4% yearly. Regionally, increasing variations in home prices and inventory levels are likely to persist. While real estate is presented with various macro challenges, we do not see significant default risk in this sector. |
| Relative Value + We are opportunistic on credit risk transfer (CRT) securities as well as non-QM deals that present strong borrower profiles and higher credit qualities. |
| Non-Agency Commercial MBS (CMBS) |
| Outlook The year ended with senior bond spreads tightening by +30 bps and depressed credit prices increasing materially. However, on a relative basis, spreads remain wide across the capital structure, even more so in mezzanine and subordinate bonds. Lower new origination coupons should induce transaction activity and refinancings; however, office sentiment has not improved. |
| Relative Value + Low leverage exposures on high-quality real estate with meaningful borrower equity present compelling opportunities to lend in both the conduit and single-asset/single-borrower (SASB) market. |
| Asset-Backed Securities (ABS) |
| Outlook Consumer fundamentals remain strong, but stress is emerging for lower income consumer as it continues to lever up. We are cautious on consumer fundamentals and watchful of credit deterioration. Prefer higher quality consumer sectors, established sponsors and sectors with positive tailwinds. |
| Relative Value + The credit curve has flattened. We are focused on senior AAA bonds across higher credit quality consumer sectors and on-the-run commercial ABS sectors. |
| Inflation-Linked |
| US |
| Outlook US TIPS real yields are attractive at levels above prior cycle highs, and breakeven inflation (BEI) levels are at or below Fed targets throughout the curve. Although we expect disinflation trends to continue, TIPS still count as good value outright and, in at least some risk scenarios, relative to USTs. |
| Relative Value + Longer-dated BEI are at best fair value versus nominal USTs in our base case, but could be attractive as a diversifier within US bond portfolios. |
| Europe |
| Outlook Inflation expectations in the eurozone have fallen quite sharply and were a large driver of the bond rally in 4Q23. We expect the lower inflation trend to continue at a gentler pace but with the fall in core beginning to lead the decline. Shorter maturity inflation pricing is very much in line with ECB target. |
| Relative Value +/- We are currently neutral on inflation at these levels. 30-year paper is still a little rich versus historical averages whereas shorter tenors are at average. |
| Japan |
| Outlook Inflation-linked JGBs remain undervalued as the current 10-year BEI is well below 2%. Underlying inflationary pressures are proving stronger than initially expected, as suggested by a more sustained rise in core inflation. |
| Relative Value + We maintain an overweight to Japanese real yields against nominal yields. |
| Municipals |
| US |
| Outlook Despite strong year-end performance, nominal municipal yields and tax-exempt income opportunities remain near decade high levels. Considering resilient credit quality supported by strong tax collections, we anticipate improved demand will support the muni market as cash investors face potentially lower income levels with the Fed expected to lower rates in 2024. |
| Relative Value + We seek opportunities to extend duration, mindful of volatility that can offer better entry points ahead of tax season. We prefer lower-rated investment-grade securities, but remain cautious on certain high-yield sectors that could be challenged by restrictive economic conditions. |
| Emerging Market (EM) Debt |
| EM Sovereigns (USD) |
| Outlook We view the combination of Fed easing, stable commodity prices and reduced geopolitical noise as key drivers of EM returns. Sources of risk encompass a “higher-for-longer” US rate scenario, unanticipated regional flare-ups and market volatility associated with upcoming elections in both EM and DM countries. |
| Relative Value + We believe frontier market sovereigns represent a compelling 2024 total return opportunity, given still-wide valuations and key idiosyncratic credit stories. |
| EM Local Currency |
| Outlook EM central banks’ proactive tightening measures over the past two years have set up a more positive outlook for both rates and FX in 2024. Latin American central banks have begun to start cutting rates, although continued easing will be dependent on Fed policy. |
| Relative Value + While FX will remain highly macro-driven, elevated EM local bond yields, particularly in Latin America, can benefit from continued disinflation and a US soft landing. Conversely, Asian local currency yields remain historically low relative to USTs. |
| EM Corporates |
| Outlook EM corporates continue to maintain strong balance sheets, but we are watching the liquidity of domestic-focused issuers given higher local rates and tightened global financial conditions, while cyclical industries face headwinds from slower growth in Europe and China. |
| Relative Value +/- Given comparatively tight valuations relative to DM corporates, we are focused on EM primary issuance at a concession to secondary. EM corporates’ lower duration and volatility may be ideal for clients looking for a more conservative allocation to EM. |
| Sector | Outlook | Relative Value | |
| Investment-Grade (IG) Corporate Credit | |||
| US | Balance sheets remain robust enough to weather the widely forecasted slower economic backdrop. While corporate managements have largely behaved conservatively given macro-related uncertainty, we are cautious about the potential for increasing bondholder unfriendly M&A activity. | +/- | Spreads are already pricing in a soft landing and, as such, do not offer much cushion against negative surprises. When weighed against a positive technical backdrop, we prefer to stay closer to home at this time. |
| Europe | Investment-grade corporate fundamentals are holding up relatively well despite a soft growth picture. Bank earnings have been strong and we continue to find value in the sector. Demand for credit continues to be robust despite the ECB stepping away in 2024. | +/- | Spreads performed well in 4Q23 and are slightly tight to historical average levels. Healthy demand for fixed-income may support these tighter levels, but we may find better entry points. |
| Australia | Fundamentals still remain sound despite the prospect of the economy slowing. We remain focused on issuers that can manage sticky inflation pressures and are defensive in nature. Fortunately, due to the monopolistic or duopolistic nature of many issuers in Australia, they naturally have these characteristics and many of the regulated assets are also protected by price resets. | + | We remain overweight credit, particularly short-dated holdings, with a preference for select REITs and utility/infrastructure assets that have regulated resets. We also favor senior unsecured major bank and foreign national champion bank issuance. |
| High-Yield (HY) Corporate Credit | |||
| US | High-yield credit spreads are fair to relatively attractive. Yields may offer attractive returns in excess of defaults, which are likely to remain near or below historical averages given the higher credit quality of the market on average. Technicals may remain supportive as higher yields have attracted institutional and fund buyers while issuance has been moderate. | + | We continue to see opportunity in service-related sectors that are still recovering from the Covid-led recession (i.e., reopening trades including airlines, cruise lines and lodging) and potential rising stars. We are more cautious on consumer products, retailers and home construction. |
| Europe | Corporate fundamentals are generally okay given recent earnings. We see some weakness in cyclical sectors given the slow European growth environment. We expect supply to increase in 1Q24, with a higher quality bias and with a continued focus on refinancing. We also expect net issuance to remain low. | +/- | Sector spreads appear vulnerable after narrowing in 4Q23 through the five-year average. We prefer short-dated yield-to-call opportunities, remain selective on the new-issue calendar with a BB/B focus and remain cautious on certain cyclical sectors (chemicals, building materials, packaging). |
| Bank Loans | |||
| US | Bank loan spreads are relatively attractive. While fundamentals have declined given higher rates and slower growth, current yields are providing ample cushion for higher defaults. Valuations have improved, and technicals may soon improve as demand for discounted floating-rate loans from CLOs may exceed moderate new-issue supply. | + | We believe outperformance will come from credit selection and avoiding problem credits. We are focused on select names where fundamentals remain intact and prices are at discounts to their call price. |
| Collateralized Loan Obligations (CLOs) | |||
| US | Improvements in CLO arbitrage or reduction of broader macro volatility are likely to be met with CLO issuance, keeping spreads range-bound in the near-term. Hedging costs for some overseas investors remain elevated, but high-quality CLO debt still offers attractive yields with limited credit risk. | + | We view investment-grade-rated CLO debt at current levels as very attractive and retain our view that it should continue to perform well in either bullish or bearish bank-loan-spread environments given strong structural protections. |
| Mortgage and Consumer Credit | |||
| Agency MBS | Agency MBS presently offers strong fundamentals with current spreads at attractive levels and prepayment risk structurally low. Diminishing Fed and bank demand coupled with increased volatility remain headwinds but present investment opportunities. | + | We favor 30- and 20-year versus 15-year MBS, focusing on security selection to enhance yield and convexity profiles. |
| Non-Agency Residential MBS (NARMBS) | Declining mortgage rates, easing inflation and rising consumer confidence are buoying US housing affordability. In the near-term, national home prices are expected to remain constrained as they move toward long-run average increases of 3%-4% yearly. Regionally, increasing variations in home prices and inventory levels are likely to persist. While real estate is presented with various macro challenges, we do not see significant default risk in this sector. | + | We are opportunistic on credit risk transfer (CRT) securities as well as non-QM deals that present strong borrower profiles and higher credit qualities. |
| Non-Agency Commercial MBS (CMBS) | The year ended with senior bond spreads tightening by +30 bps and depressed credit prices increasing materially. However, on a relative basis, spreads remain wide across the capital structure, even more so in mezzanine and subordinate bonds. Lower new origination coupons should induce transaction activity and refinancings; however, office sentiment has not improved. | + | Low leverage exposures on high-quality real estate with meaningful borrower equity present compelling opportunities to lend in both the conduit and single-asset/single-borrower (SASB) market. |
| Asset-Backed Securities (ABS) | Consumer fundamentals remain strong, but stress is emerging for lower income consumer as it continues to lever up. We are cautious on consumer fundamentals and watchful of credit deterioration. Prefer higher quality consumer sectors, established sponsors and sectors with positive tailwinds. | + | The credit curve has flattened. We are focused on senior AAA bonds across higher credit quality consumer sectors and on-the-run commercial ABS sectors. |
| Inflation-Linked | |||
| US | US TIPS real yields are attractive at levels above prior cycle highs, and breakeven inflation (BEI) levels are at or below Fed targets throughout the curve. Although we expect disinflation trends to continue, TIPS still count as good value outright and, in at least some risk scenarios, relative to USTs. | + | Longer-dated BEI are at best fair value versus nominal USTs in our base case, but could be attractive as a diversifier within US bond portfolios. |
| Europe | Inflation expectations in the eurozone have fallen quite sharply and were a large driver of the bond rally in 4Q23. We expect the lower inflation trend to continue at a gentler pace but with the fall in core beginning to lead the decline. Shorter maturity inflation pricing is very much in line with ECB target. | +/- | We are currently neutral on inflation at these levels. 30-year paper is still a little rich versus historical averages whereas shorter tenors are at average. |
| Japan | Inflation-linked JGBs remain undervalued as the current 10-year BEI is well below 2%. Underlying inflationary pressures are proving stronger than initially expected, as suggested by a more sustained rise in core inflation. | + | We maintain an overweight to Japanese real yields against nominal yields. |
| Municipals | |||
| US | Despite strong year-end performance, nominal municipal yields and tax-exempt income opportunities remain near decade high levels. Considering resilient credit quality supported by strong tax collections, we anticipate improved demand will support the muni market as cash investors face potentially lower income levels with the Fed expected to lower rates in 2024. | + | We seek opportunities to extend duration, mindful of volatility that can offer better entry points ahead of tax season. We prefer lower-rated investment-grade securities, but remain cautious on certain high-yield sectors that could be challenged by restrictive economic conditions. |
| Emerging Market (EM) Debt | |||
| EM Sovereigns (USD) | We view the combination of Fed easing, stable commodity prices and reduced geopolitical noise as key drivers of EM returns. Sources of risk encompass a “higher-for-longer” US rate scenario, unanticipated regional flare-ups and market volatility associated with upcoming elections in both EM and DM countries. | + | We believe frontier market sovereigns represent a compelling 2024 total return opportunity, given still-wide valuations and key idiosyncratic credit stories. |
| EM Local Currency | EM central banks’ proactive tightening measures over the past two years have set up a more positive outlook for both rates and FX in 2024. Latin American central banks have begun to start cutting rates, although continued easing will be dependent on Fed policy. | + | While FX will remain highly macro-driven, elevated EM local bond yields, particularly in Latin America, can benefit from continued disinflation and a US soft landing. Conversely, Asian local currency yields remain historically low relative to USTs. |
| EM Corporates | EM corporates continue to maintain strong balance sheets, but we are watching the liquidity of domestic-focused issuers given higher local rates and tightened global financial conditions, while cyclical industries face headwinds from slower growth in Europe and China. | +/- | Given comparatively tight valuations relative to DM corporates, we are focused on EM primary issuance at a concession to secondary. EM corporates’ lower duration and volatility may be ideal for clients looking for a more conservative allocation to EM. |