The key to an improved tone and more stability in fixed-income markets is a moderation in inflation. In the US, there are signs that the labor market is softening, and the housing market is beginning to slow as higher mortgage rates begin to bite. Anecdotal evidence from corporates indicates inventories are normalizing and demand is softening. In Europe, higher energy costs and inflation are hampering consumption and negatively impacting business and consumer confidence. We anticipate inflationary pressures will peak in the coming months and decline as 2023 progresses. While global central banks are expected to raise interest rates further in the short term, we believe more aggressive action is already anticipated by the markets. Fundamental headwinds to global growth and inflation remain. These include the reduction of global fiscal stimulus, the withdrawal of monetary policy accommodation and the persistence of secular-related headwinds such as global debt burdens, aging demographics and technology displacement. As growth and inflation moderate and the risks surrounding central bank policy become more balanced, so too should the market environment for fixed-income investors. Here, we provide a summary of the key drivers behind our global outlook and describe where we see value across global fixed-income markets.

KEY DRIVERS
The Big Picture

Global Market Rates: Relative Value by Region

CANADA: Policy rates may undershoot forwards but market yields are likely to remain range-bound given the yield curve is already so inverted.
US: Stickiness of lagging inflation measures has postponed the Fed’s pause and elevated the peak rate. We now expect the Fed to pause in 1Q23. Longer-dated US Treasury (UST) bonds are likely to be supported by slowing growth, both domestically and globally, and an expectation that restrictive Fed policy will successfully bring down inflation.
UK: We feel that the market is expecting too much in terms of rate hikes, and therefore gilts should outperform.
EUROPE: We expect a moderate decline in yields but would be wary around Italian spreads as the market is beginning to question fiscal trajectories.
CHINA: We expect rates to remain low with long-term rates well anchored by targeted tightening and a universal easing approach toward all macroeconomic levers.
JAPAN: We expect stable JGB yields with a slight steeper curve under the YCC program.
AUSTRALIA: We remain focused on the 10- and 20-year bonds as the curve still remains relatively steep versus other DM yield curves, and still remains priced for further RBA action.
See Relative Value by Sector section for the Emerging Markets outlook.
US Ongoing Fed hikes increase the chances for recession both in the US and globally. As of yet, however, the only real sign of weakness in the US economy is the emerging sharp declines in residential construction spending. On the price front, there are a number of encouraging signs that inflation will slow markedly, but these indications have yet to bear tangible fruit.
Canada The Bank of Canada has matched, even led, Fed tightening to date, but the Canadian economy is more sensitive to both higher rates and slower global growth. We anticipate policy rate hikes may end as soon as October if there is any downshift in the labor market from here.
Europe With the ECB part way through front-loading policy tightening, inflation likely having peaked and the growth outlook deteriorating, we feel that the ECB will not be able to deliver the tightening markets are currently pricing. The risk of energy rationing still remains a key risk.
UK While we expect the BoE to deliver a significant rate hike at its November meeting, we believe that the BoE’s hiking cycle is likely to end earlier and lower than the market expects as fiscal pressures weaken household demand and the job market loosens.
China We expect 2022 growth to come in between 4% and 5%; with policymakers focused on stability with some growth upside; the COVID-19 omicron variant continues to challenge China’s approach to Covid.
Japan We expect that the Japanese economy will continue to grow at 1.5%-2.0% in 2022 and 2023. Inflation rates are expected to increase in 2022 and moderate early in 2023. The Bank of Japan (BoJ) will likely maintain its current monetary accommodation—unlike other developed market (DM) central banks—to support its economy under the relatively low inflation. However, we think that the BoJ is open to make minor adjustments necessary to maintain the yield-curve control (YCC) framework because of the pressure from increasing amounts of Japanese government bonds (JGBs) to purchase.
Australia The Reserve Bank of Australia (RBA) has moved the cash rate quickly from 0.10% to 2.60% and we now expect it to have a more moderate approach to monetary policy tightening and achieve a 3.10% cash rate by the end of 2022. Living costs have risen and that, combined with the rate rises, will bring growth down in 2023. We believe the RBA is attempting to walk the tightrope and hoping to achieve its goal of returning inflation to its target band over time, without forcing a recession.

Relative Value by Sector