2024 Global Fixed Income Outlook
Third Quarter
Key Takeaways
The European Central Bank has made its first rate cut in more than eight years, but the Fed remains on hold with mixed, above-target inflation data.
We expect growth to slow and interest rates to drop, which we believe should generate solid total return potential for bond investors.
Inflation, Election Shape Bond Market Outlook
What a difference a half-year makes.
U.S. markets entered 2024 expecting at least six Federal Reserve (Fed) rate cuts — double what policymakers projected at their December meeting. But, as of mid-year, the Fed remained on hold, and the futures market projected the Fed would cut rates once or twice before year-end.
Many observers expected the Fed to pave the way for lower rates across developed markets. But the European Central Bank was the trailblazer, announcing in June its first rate cut in more than eight years amid easing inflation.
But in the U.S., persistent above-target inflation has forced the Fed into a waiting game. While inflation has slowly retreated off multidecade highs, housing and services costs remain elevated, and core inflation has consistently stayed above target.
We believe recent rent and housing data suggest shelter costs may be stabilizing. Services inflation, on the other hand, remains a mixed bag. Additionally, the election’s effects are coming into focus.
Recent softening in the labor market and decelerating wage growth could weigh on discretionary spending and force some prices lower. But non-cyclical components, such as health care services and motor vehicle insurance, where there are limited alternatives for consumers, remain elevated.
Meanwhile, the upcoming presidential election has inflationary implications. Both candidates support tariffs, which could drive certain prices higher. Changes to U.S. immigration policy following the election could also affect the nation’s growth and inflation outlooks.
We Believe Attractive Yields Highlight Total Return Potential
Alongside persistent inflation, high interest rates and broad uncertainty, the resulting yield backdrop may provide some relief for U.S. bond investors. Yields across bond market sectors have climbed, as Figure 1 highlights.
Figure 1 | Most Fixed-Income Sectors Have Offered Yields of 5% or More
Yield-to-Maturity (%)
Data as of 4/30/2024. Source: FactSet, JPMorgan, Morningstar, American Century Investments. Percentages represent the average yield-to-maturity within each named sector. Past performance is no guarantee of future results. Leveraged loans are extended to companies with considerable debt loads or poor credit histories and therefore carry higher risks and higher interest rates than other fixed-income securities. U.S. Aggregate Credit represents the yield of the Bloomberg U.S. Government/Credit Index, a measure of the government and corporate securities within the Bloomberg U.S. Aggregate Bond Index.
Our outlook calls for growth to slow and interest rates to drop, which we believe should generate solid total return potential for bond investors. Even if the economy performs better than expected and interest rates move higher, we believe current yields are likely to provide a total return cushion.
Quality, Duration Drive Sector Management
Overall, we remain selective and generally favor higher-quality bonds. Given a likely economic slowdown and pending Fed rate cuts, we think a modest duration overweight still makes sense.
U.S. Government
Amid near-term uncertainty surrounding Fed policy, economic data and inflation, we expect Treasury yields to remain volatile. But we ultimately expect the economy to slow to a below-trend pace, which would likely help ease inflation further and prompt a Fed pivot. Against this backdrop, we expect yields — especially those in the short/intermediate-maturity range — to fall and ultimately stabilize. We believe this scenario warrants a modest overweight to duration.
U.S. Securitized
Given the uncertainty surrounding Fed policy, we expect agency mortgage-backed securities (MBS) valuations to remain range-bound. We still favor overweighting the sector, believing it offers relative value versus others due to its high quality and conservative nature compared to broader market volatility. Among credit-sensitive subsectors, we prefer higher-quality, shorter-duration securities and seek to remain invested amid heavy demand. We respect the strong technical backdrop while rotating toward subsectors with solid fundamentals.
Municipal
We believe the relatively high quality and longer duration of municipal bonds should aid the asset class as the economy slows. Municipal credit fundamentals should remain durable, supported by reserve fund balances and conservative budgeting. States that rely heavily on personal income taxes will likely face declining revenues. We generally favor higher-quality issuers and sectors and believe security selection remains crucial to performance, particularly among high-yield issuers. This year’s tax-exempt supply is ahead of expectations due to an increase in tax-exempt refundings of legacy Build America Bond debt. Additionally, election uncertainty has pulled some issuance into the first half of the year.
U.S. Corporate & Non-U.S. Developed Markets
We favor higher-yielding, short-duration securities in the U.S. and non-U.S. investment-grade and high-yield universes. We are focusing on event-driven opportunities where borrowers may call bonds early, further enhancing the return profiles. In our view, actively investing in these opportunities should drive performance while credit spreads remain in a lower-volatility, tight trading range. While corporate fundamentals appear strong, valuations seem stretched. Most borrowers have access to capital and have taken advantage of a favorable refinancing environment. Certain sectors, such as media and telecommunications, remain under secular pressure, limiting borrowers’ ability to refinance upcoming maturities. As a result, we expect defaults to rise modestly.
Money Markets
Following the SEC’s dramatic money market reforms, we expect consolidation in the money market industry, with prime (credit) funds closing/converting to government funds. Accordingly, we expect spreads to widen slightly in commercial paper and continued demand for U.S. Treasury bills. Following supply cuts in the first half of 2024, we expect approximately $300 billion in net excess Treasury supply in the second half. As rate cut expectations come to light during the Fed’s summer policy meetings, we will look for relative value among credit and Treasury securities. We expect to extend duration in fixed-rate coupons into 2025, a move we believe will enhance performance potential into year-end amid likely volatility.
Emerging Markets
We still expect a much better environment for local currency emerging markets (EM) bonds. EM central banks have brought down core inflation at a much faster pace than developed markets (DM) central banks. As the U.S. feels the full effects of its aggressive rate-hike cycle, we believe global growth may slow further. Declining U.S. rates should relieve the pressure on EM rates, allowing EM central banks to start easing at a much faster pace than the Fed, thus providing positive return potential from duration. We favor countries with steep yield curves and real rate cushions, such as Mexico, Indonesia, Brazil and Peru, and underweighting China, where we expect more fiscal stimulus.
References to specific securities are for illustrative purposes only and are not intended as recommendations to purchase or sell securities. Opinions and estimates offered constitute our judgment and, along with other portfolio data, are subject to change without notice.
International investing involves special risks, such as political instability and currency fluctuations. Investing in emerging markets may accentuate these risks.
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
Historically, small- and/or mid-cap stocks have been more volatile than the stock of larger, more-established companies. Smaller companies may have limited resources, product lines and markets, and their securities may trade less frequently and in more limited volumes than the securities of larger companies.
Diversification does not assure a profit nor does it protect against loss of principal.
Generally, as interest rates rise, bond prices fall. The opposite is true when interest rates decline.
Past performance is no guarantee of future results. Investment returns will fluctuate and it is possible to lose money.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.
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