Recent inflation prints across a number of key developed markets (DMs) offer optimism in the fight against inflation. While global central banks are expected to raise interest rates further in the short term, weaker economic data and lower inflation have seen markets pare back policy rate hike expectations. As inflation continues to moderate, we expect DM government bond yields to stabilize as we move through 1H23. 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.

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 that the yield curve is already so inverted.
US: We still expect a rate hike pause in 1Q23 as inflation declines toward the Fed’s target, though the Fed’s focus on labor market rebalancing may keep volatility relatively high. Longer-dated US Treasury (UST) bonds are likely to be supported by slowing growth and inflation, though recession fears may keep intermediate UST yields relatively low.
UK: We feel that the market is expecting too much in terms of rate hikes, and therefore gilts should outperform.
EUROPE: We expect yields to decline modestly. Headwinds would be high levels of supply and ECB purchases being reduced later in the quarter.
CHINA: We expect rates to remain low for 1Q23 and thereafter to a more normalized monetary policy stance by the PBoC.
JAPAN: We expect higher Japanese government bond (JGB) yields. 10-years would lead yield rises if the BoJ were to adjust its monetary policy further.
AUSTRALIA: We remain focused on the 10- and 20-year bonds as the curve continues to be relatively steep versus other DM yield curves and remains priced for further RBA action.
See Relative Value by Sector section for the Emerging Markets outlook.
US We believe the effects of Fed rate hikes to date are accumulating and that inflation is moderating across the economy. Given the slowdown in economic activity (specifically in construction and manufacturing) and the progress made on inflation, we think a change in the Fed’s policy slant will be coming soon.
Canada The Bank of Canada will likely end its rate hiking cycle ahead of the Fed, though recent employment and growth data mean that one last rate hike in 2023 is probable. The Canadian economy is more sensitive to both higher rates and slower global growth.
Europe A sharp deterioration in growth has been avoided and past demand is supporting current growth. Once this is filled, growth will begin to reflect future demand, which is weak. Inflation will gently begin to turn lower.
UK While we expect the BoE to deliver additional rate hikes during 1Q23, 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 2023 growth to come in between 4.5% and 5.5%; with policymakers focused on economic recovery. Reflation is likely to be more manageable given the negative output gap in China and significant labor market slack.
Japan The Bank of Japan (BoJ) will likely maintain its monetary accommodation despite market speculation of a policy change because it is still difficult to imagine that the inflation target will be met. Even after the December shock, the BoJ remains open to making further adjustments necessary to maintain the yield curve control (YCC) framework, allowing the nominal 10-year yield to rise.
Australia The Reserve Bank of Australia (RBA) moved the cash rate quickly from 0.10% to 3.10% over the eight months ending December 2022. Its effect on the economy remains to be seen, but should slow growth in 2023. We believe the RBA is attempting to walk a tightrope and hoping to achieve its goal of returning inflation to its target band over time, without forcing a recession and is therefore unlikely to reach the 4% cash rate priced by the market in 2023.

Relative Value by Sector