In line with our expectations, global growth is downshifting and the disinflation process is clearly underway, albeit unevenly. Lessening bottleneck pressures, financial stability concerns contributing to tighter credit conditions in the US and Europe and softer manufacturing and services demand worldwide are helping to alleviate price pressures globally. These trends, combined with the major central banks continuing to advocate for restrictive monetary policy for an extended period, should further temper growth and inflation. In such a scenario, we expect developed market (DM) government bond yields to trend lower and that the US dollar will weaken modestly. These factors should act as a tailwind for emerging markets (EM), where central banks are closer to the end of the tightening cycle relative to the developed world, and valuations are attractive. Spread sectors such as high-yield, bank loans and select areas of the mortgage-backed securities (MBS) space also offer attractive yield but we acknowledge that credit markets remain vulnerable to unanticipated shifts in macro-related sentiment, geopolitical developments and the risk of central bank overtightening. Here, we provide a summary of the key drivers behind our global outlook and describe where we see value across global fixed-income markets.

The Big Picture

Global Market Rates: Relative Value by Region

US: US bond markets appear to have foreseen an imminent end to Fed tightening, hence the last few weeks’ selloff in the face of data apparently pointing to further Fed hikes. We think long yields have risen enough in the face of the new realities, but time will tell.
Canada: With the front end now fully repriced for likely Bank of Canada (BoC) hikes, bonds are again fairly valued versus their US counterparts. The recent gains in the Canadian dollar have put the currency close to fair value.
Europe: We believe that the ECB runs the risk of tightening policy by too much. Weaker growth and falling inflation should allow the ECB to stop hiking in H2, which will support euro area bond yields.
UK: We feel that the market is expecting too much in terms of Bank of England (BoE) rate hikes, and therefore gilts should outperform.
China: We expect the PBoC to maintain low rates in 3Q23 and thereafter shift to a more normalized monetary policy stance.
Japan: We expect higher Japanese government bond (JGB) yields. If the Bank of Japan (BoJ) adjusts its monetary policy further, the nominal 10-year yield would lead the move higher.
Australia: We remain tactical in the 10- and 20-year parts of the curve on further Reserve Bank of Australia (RBA) action.
US US growth is decelerating, and corporate earnings look to be declining, albeit from relatively high levels. There also still looks to be a downtrend in inflation. The question is whether these slowing trends are proceeding fast enough to mollify the Fed. This is looking less likely lately.
Canada The BoC resumed its rate-hiking cycle, though we think the market now is extrapolating too much from here. While the Canadian economy did not prove as sensitive to higher rates as expected, in particular to residential mortgage rates, lagged impacts are still in the pipeline. Core inflation, while well off of 2022 highs, has been trending down over the past year.
Europe We believe the ECB will be able to stop tightening policy over the coming months when it sees evidence of inflation slowing meaningfully in H2 as suggested by forwarded-looking indicators. Economic activity should remain weak as previous tightening gains traction and more signs of labor market weakness emerge.
UK Additional hikes by the BoE will require evidence of more persistent inflationary pressures. Forward-looking indicators suggest that inflation will slow materially. Economic activity should remain lackluster at best as previous tightening gains traction and the labor market loosens further.
China We expect 2023 growth to come in between 4.5% and 5.5%, with policymakers focused on economic recovery. We do not expect broadbased growth stimulus; rather, we expect continued, targeted measures.
Japan Given stronger than expected growth and inflation, the BoJ remains open to making the necessary adjustments to maintain its yield curve control (YCC) framework.
Australia Growth is expected to slow throughout the second half of 2023 as the RBA remains committed to bringing inflation back to target. The runway for a soft landing has shortened as the RBA continues to hike; however, a technical recession likely would only be mild if it occurs at all, due to a solid fiscal position, the immigration bounce-back and the country’s current strong export position.

Relative Value by Sector