A summary of our fixed income outlook
- The government-mandated stress tests induced tremendous capital discipline in banks and corporate balance sheets. Most credit asset classes benefited from the rate rally and extraordinary monetary policies during the pandemic. Yet, at the historically low rates of today and with elevated correlations across asset classes, we believe the ability of fixed income, and sovereign yields in particular, to offer lower risk or hedging capabilities will be increasingly limited.
- With short-term rates in the U.S. pegged securely between 0 and 25 basis points (“bps”), additional asset purchases by the Federal Reserve, and fiscal spending set to rise with Democratic administration, we believe that the yield curve will have modest steepening over the coming year.
- Over the long-term, we expect the steepening of the yield curve and inflation expectations to accelerate in pace as fundamental data strengthens. As such, duration will not be able to play the diversifying role nor be a significant contributor of returns ahead. Instead, we are shifting to an environment where credit risk premia and selectivity will be the key drivers of fixed income returns. Broadly, we view credit markets to lean negative, yet select credit pockets look attractive: bank loans, high quality structured credit, real estate debt and emerging market debt, particularly regions in Asia. These credit sectors may offer a blend of yield, total return and diversification benefits to investor portfolios in the future.
Interested in learning more?
Download the full Annual Outlook.
Tags: Income, Interest rates