As we anticipated, global growth has downshifted and inflation rates worldwide are generally receding. Tightening financial conditions in the US and Europe, 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 major central banks advocating for a prolonged period of restrictive monetary policy, are expected to further dampen economic growth and inflation which, in turn, should lead to lower developed market (DM) government bond yields and a modestly weaker US dollar. That stated, 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 lead to periods of heightened market volatility. Spread sectors such as emerging markets (EM), 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 macro-related sentiment, geopolitical developments and the ongoing risk of central bank overtightening.

The Big Picture

Global Market Rates: Relative Value by Region

See Relative Value by Sector section for the Emerging Markets outlook.
US: US bond markets overreacted to both the higher expected UST supply and the shift in Fed rhetoric regarding 2024 policy rates. We expect bond yields to reflect lower longer-term growth and inflation. While the timing of the shift in Fed policy direction is still uncertain and months away, both medium- and long-dated bond yields should be moving lower in 2024.
Canada: While the front end of the Canadian government bond yield curve likely is in line with Bank of Canada (BoC) stability and comparable to US rates, longer-dated bond yields look low in comparison to both policy rates and US bond yields. Bonds are again fairly valued versus their US counterparts. The Canadian dollar is unlikely to benefit from portfolio inflows.
Europe: We believe that the ECB runs the risk of keeping policy too tight for too long. Weaker growth and falling inflation will support euro area bond yields. Debt metrics at the eurozone level are less onerous than elsewhere.
UK: We feel that focus will shift toward future BoE rate cuts, and gilts should provide positive returns.
China: We expect the PBoC to maintain low rates in Q4 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 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 as volatility remains the norm. With the 10-year bond 40 bps above the cash rate, it is very different than other markets where an inverse relationship exists.
US US growth is decelerating sharply into 2024, though uncertainty remains over the pace of the downtrend in inflation. Both the labor market rebalancing and decline in inflation will continue whether the Fed hikes again in Q4 or not. Risks to our benign base case remain to the downside.
Canada The BoC has likely completed its rate-hiking cycle following the pause, but it will still be some time before rate cuts are warranted. Demand pressures remain resilient relative to supply in both housing and service sectors, and wages have surprised on the high side. The downtrend in core inflation has flattened out recently.
Europe ECB policy has reached a level that ECB officials believe will bring inflation to target over their forecast horizon. Economic activity should remain weak as previous tightening gains traction and this will likely see inflation decline closer to target earlier than ECB forecasts.
UK The BoE recently left rates unchanged at 5.25%. We do not expect additional monetary policy tightening as inflation should slow further during Q4. Forward-looking indicators suggest that 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 broad-based growth stimulus; rather, we expect continued, targeted measures.
Japan Given stronger-than-expected growth and inflation, the BoJ remains open to make further adjustments in terms of a set of policy tools such as the size of its balance sheet.
Australia Consumer resilience is expected to fade as the full effects of policy tightening takes hold. Although the heavy lifting by the Reserve Bank of Australia (RBA) is done, borrowing rate conversion, cost of living increases, contracting real incomes and declining savings should all work to curtail discretionary spending into 2024. That said, with unemployment expected to remain relatively low, it’s likely to create a scenario of only a mild recession or one averted.

Relative Value by Sector