2024 Global Fixed Income Outlook
Fourth Quarter
Key Takeaways
The Federal Reserve’s (Fed’s) recent policy shift reflects concerns about the job market, which may drive interest rate decisions in the coming months.
We expect near-term economic growth to slow and interest rates to fall, which should generate attractive opportunities for bond investors.
Fed Retains Spotlight as Policy-Change Effects Unfold
As has been the case throughout the year, all market eyes remain on the Fed. Now that policymakers have cut interest rates for the first time in more than four years, what’s next?
After holding rates at a 23-year high for 14 months to tame inflation, Fed officials are confident target inflation is within reach. They believe their policy shift can engineer a soft landing, but the number of rate cuts required to achieve that goal remains unclear, and the economic stakes are high.
We know from experience that the economy’s trajectory can sometimes turn quickly. Gross domestic product (GDP) has been surprisingly resilient, but cracks are emerging, particularly within the labor market and the manufacturing sector. Although core inflation (which excludes food and energy prices) has moderated, it still sits above the Fed’s 2% target.
A Growing Focus on the Labor Market
We believe recent inflation trends were sufficient to support the September rate cut. Looking ahead, the evolving employment backdrop will likely drive the timing and magnitude of subsequent cuts.
Amid growing labor market concerns, Fed officials have noted they seek to balance their dual responsibility of promoting stable prices and full employment. Softening in the labor market and decelerating wage growth could weigh on discretionary spending and force some prices lower.
Additionally, services inflation remains elevated. A structural housing supply shortage and home price appreciation have been key drivers. Conversely, goods inflation has been flat to slightly negative, but risks from shipping costs and deglobalization persist.
The upcoming U.S. presidential election also has inflationary implications. Both parties have indicated support for tariffs, which could drive certain prices higher. Also, deficit spending is likely to continue regardless of who wins, which, in addition to being inflationary, should drive longer-term interest rates higher.
Central Banks on Similar Paths
With its policy pivot, the Fed is now in sync with most of its peers. In Europe, where growth remains weak, the European Central Bank cut rates in June, and we expect two more cuts by year-end. The Bank of England eased in August, and, despite persistent inflation, we anticipate officials may lower rates two more times this year.
Meanwhile, Japan’s central bank has struggled to pursue a more hawkish course amid market resistance. The economy has struggled to achieve stable growth momentum, which led to adverse market responses to the modest rate hikes this year. We believe another slight hike may occur before year-end.
Quality Is Still Key as Slowdown Looms
In the coming months, we still expect growth to slow and interest rates to drop, which should generate solid total return potential for bond investors.
Overall, we remain selective and generally favor higher-quality bonds. Given a likely economic slowdown and additional Fed rate cuts, we believe a modest duration overweight still makes sense.
U.S. Government
Given our expectations for softer economic data and slowly moderating inflation, we expect the 10-year Treasury yield to remain in an approximate range of 3.5% to 3.9%. We also expect the yield curve to steepen, which has prompted us to emphasize the curve’s short and intermediate areas. We believe this strategy may offer attractive near-term potential from a Fed policy perspective while potentially guarding against the longer-term effects of a soaring federal deficit.
U.S. Securitized
We continue to favor the agency mortgage-backed securities (MBS) sector, believing it offers relative value versus other sectors due to its high quality and relative protection from broader market volatility. Among credit-sensitive subsectors, we prefer higher-quality, shorter-duration securities. In particular, demand for asset-backed securities (ABS) remains strong due to attractive spreads relative to corporates, solid fundamentals and positive flows into fixed income. Overall, we plan to continue rotating toward subsectors with strong technical backdrops, solid fundamentals and structural protection.
Municipal
We believe municipal bonds' relatively high quality and longer duration should aid the asset class as the economy slows. Municipal credit fundamentals should remain durable, supported by reserve fund balances and conservative budgeting. We expect flat to slightly declining state revenues, with a focus on projected budget gaps in future years. Meanwhile, the November election will shape upcoming tax policy and federal deficit projections. Overall, we favor higher-quality issuers and sectors and believe security selection remains crucial to performance, particularly among high-yield issuers.
U.S. Corporate & Non-U.S. Developed Markets
We favor higher-quality, higher-yielding, shorter-duration securities in the U.S. and non-U.S. investment-grade and high-yield universes. We are focusing on catalyst-driven opportunities to enhance return potential. In our view, actively investing in these opportunities should drive performance while valuations remain tight. In the U.S., bank fundamentals remain strong, and we expect to increase exposure on cheaper valuations. We are generally cautious toward European credit valuations but favor financial sector credit, especially subordinated banks, where we believe valuations still offer upside potential. Bottom-up security selection drives our exposure among high-yield corporates in the U.S. and Europe, where our focus remains on BB- and B-rated securities.
Money Markets
As Fed policy and rate cut expectations unfold, we will look for relative value among credit and Treasury securities. We expect to purchase more floating-rate and short (maturing in five months and less) securities to maintain a relatively neutral duration. As appropriate, we plan to swap out of Treasury bills and into overnight commercial paper to seek yield advantages.
Emerging Markets
We have become somewhat cautious on dollar-denominated emerging markets (EM) securities. The supportive backdrop of growth resiliency, relatively high commodity prices and low volatility has started to deteriorate. Likewise, sluggish growth in China is weighing on commodity prices, and a potential escalation of geopolitical conflicts along with the upcoming U.S. election could affect risk appetites. EM spreads tend to be more volatile at the beginning of a Fed cutting cycle, and we expect further decompression of spreads in the coming months. Meanwhile, we remain neutral to slightly bearish toward EM currencies amid Fed rate cut expectations and elevated U.S. election-related volatility. Additionally, slowing global growth doesn’t bode well for EM currencies, given the U.S. dollar’s perceived safe-haven appeal.
Explore Our Global Fixed Income Capabilities
The letter ratings indicate the credit worthiness of the underlying bonds in the portfolio and generally range from AAA (highest) to D (lowest).
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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