Q4 Public & Private Fixed Income Outlook

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Across most developed markets, conditions keep pointing to one outcome: a “Muddle Through” scenario characterized by low to moderate growth with mildly-sticky inflation. Generous yields across public and private credit continue to drive the yield-is-destiny theme, which may gain a tailwind from downward rate pressure on certain monetary policy regimes.

SUMMARY OF SHORT-TERM SECTOR VIEWS:

Sector Outlook
DM Rates Although the sector remains vulnerable to numerous global crosscurrents, central bank easing biases create a mild tailwind for Western rates. Positioning remains tactical along yield curves and around market pricing.
Agency MBS Even with tight OAS profiles, MBS carry remains intact versus intermediate Treasuries as the Fed easing cycle begins. We prefer a barbell position consisting of lower 30-year coupons and 30-year coupons near par, while avoiding the middle of the stack. We continue to favor better cashflows and convexity via specified pools rather than TBAs.
Securitized Credit Securitised spreads generally remain wider YTD, but tighter than historical averages. Amid flat credit curves, high-quality securitized assets continue to offer attractive valuations relative to other fixed income sectors. Our outlooks for CMBS, RMBS, CLOs, and ABS reflect a tighter than average spread environment combined with weaker or normalizing underlying asset fundamentals. Our “carry” base case calls for limited total return potential—from limited capital appreciation— and thicker tails. We remain focused on tranches at or near the top of capital structures and are highly selective regarding more credit-sensitive positions given the risk/reward dynamic. In asset-based finance markets, positive capital flows continue; we are targeting structures suited to perform through the cycle in prime consumer, commercial, and residential subsectors.
Global IG Corporates With IG corporate spreads near multi-decade tights, further spread compression is likely to be limited in Q4. Our base case calls for the U.S. and European economies to “muddle through” and for spreads to be range-bound near current levels. That stated, yields are still relatively high and continue to drive strong demand for IG corporate bonds.
Global Leveraged Finance We expect global leveraged finance spreads to maintain a range near historical tights as persistently strong technicals and a sound credit environment are likely to continue to hold firm against prevailing global macro risks. While still constructive overall, we maintain our close-to-home defensive positioning in U.S. high yield bonds and loans as well as underweights to cyclicals and more focused on defensive sectors in Europe.
EM Debt Modest spread tightening and carry conditions. Despite elevated macro uncertainty, EM economic growth remains comparably high, fundamentals have broadly improved, and yields stand out versus other fixed income sectors. We remain focused on resilient issuers and are modestly cautious around spread risk as we have yet to observe the full impact of U.S. tariff policy. Due to stretched valuations, we are cautiously constructive on EM rates and expect the U.S. dollar to maintain its weakening bias. EM corporates continue to offer diversification opportunities.
Municipal Bonds Muni rates remain attractive in both absolute terms and relative to Treasuries. September’s improved performance suggests that “Muddle Through” conditions pair well with Munis’ resilient profile. While taxable spreads have tightened, they remain wide to corporates, suggesting additional compression is possible.

References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities. The securities referenced may or may not be held in the portfolio at the time of publication and, if such securities are held, no representation is being made that such securities will continue to be held.

 

The views expressed herein are those of PGIM investment professionals at the time the comments were made, may not be reflective of their current opinions, and are subject to change without notice. Neither the information contained herein nor any opinion expressed shall be construed to constitute investment advice or an offer to sell or a solicitation to buy any securities mentioned herein. Neither PFI, its affiliates, nor their licensed sales professionals render tax or legal advice. Clients should consult with their attorney, accountant, and/or tax professional for advice concerning their particular situation. Certain information in this commentary has been obtained from sources believed to be reliable as of the date presented; however, we cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. The information contained herein is current as of the date of issuance (or such earlier date as referenced herein) and is subject to change without notice. The manager has no obligation to update any or all such information; nor do we make any express or implied warranties or representations as to the completeness or accuracy.

 

Any projections or forecasts presented herein are subject to change without notice. Actual data will vary and may not be reflected here. Projections and forecasts are subject to high levels of uncertainty. Accordingly, any projections or forecasts should be viewed as merely representative of a broad range of possible outcomes. Projections or forecasts are estimated based on assumptions, subject to significant revision, and may change materially as economic and market conditions change.


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