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.

The Big Picture

Global Market Rates: Relative Value by Region

See Relative Value by Sector section for the Emerging Markets outlook.
US: US bond yields still have yet to reflect lower longer-term growth and inflation. The shift in Fed policy direction is expected by mid-year, so both medium- and long-dated bond yields should be moving lower in 2024.
Canada: BoC rate cuts are coming but are mostly priced in over 1H24. Medium-term yields will still benefit when the rate cycle turns. Longer-term yields are fairly valued versus the US given the fiscal outlook but will struggle to outperform.
Europe: After a sizeable rally in 4Q23 we have pared back our eurozone bond overweight. We still expect further gains and would likely add more if yields retrace from recent lows.
UK: We feel that focus will remain on the timing and extent of future BoE rate cuts. Given our outlook, the market could still be underestimating the amount of monetary policy easing that will come. Gilts should provide positive returns.
China: We expect the People’s Bank of China (PBoC) to maintain low rates in 1Q24 with a more supportive monetary policy stance.
Japan: We expect higher Japanese government bond (JGB) yields.
Australia: We remain tactical in the 10- and 20-year parts of the curve as volatility remains the norm. We are less bullish on duration following the strong 4Q23 rally, but still anticipate more upside.
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