Fed Rate Cuts Bolster Case for Bonds
PGIM Fixed Income’s Greg Peters explains reasons why he continues to see a favorable backdrop for fixed income in the current rate-cutting cycle.
Bond Bull Market Fuels Active Opportunities
Dec 12, 2024
The fixed income bull market is likely to see compelling entry points as growth and inflation dynamics widen and prompt uneven central bank responses.
Bullish bond conditions born out of the 2022 bear market persisted in 2024. Major central banks eased short-term rates during the year and further rate cuts may materialize in 2025. Global rate correlations should decrease as growth and inflation dynamics continue to widen, which should prompt uneven central bank policy responses. Against this diverging backdrop, we maintain a positive fixed income outlook and think current conditions offer a compelling entry point for investors, especially those on the sidelines or overallocated to equities after the stock market’s recent run.
A MORE GRADUAL PATH TO NEUTRAL
- Global economy: The global economy is resilient. Moderation remains our base case, with the potential for a recession in 2025 declining. In the U.S., we expect GDP growth of ~1.8% in 2025. We see modest growth in the euro area in 2025 as economic conditions improve. We believe China’s growth may be close to 4.5% given recent stimulus measures.
- Interest rates: Interest rates have passed their peaks, potentially adding momentum to the existing bull market. Quarterly fluctuations notwithstanding, odds favor stable-to-lower yields ahead, which bodes well for fixed income returns whether they come from carry or total return.
AVERAGE CHANGE IN 10-YEAR U.S. TREASURY YIELD AFTER FIRST FED CUT
Source: PGIM Investments using data from Bloomberg and Morningstar as of 11/30/2024.
SOLID CREDIT FUNDAMENTALS
Although credit spreads are tight and vulnerable to short-term setbacks, fundamentals remain firm, as does net demand for fixed income as growth moderates. Default expectations generally remain below historical averages. This combination of factors suggests that spreads may remain in a historically tight range for some time to come. In terms of potential surprises, an unexpected acceleration in inflation, particularly based on the various core measures, could catch participants leaning the wrong way, making active management critical.
Gregory Peters
Co-Chief Investment Officer of PGIM Fixed Income
Navigating an ever-changing market underscores the importance of agility and anticipation, particularly when signs of another paradigm shift emerge. With dispersions high across many sectors and regions, credit selection remains critical to outperformance.
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The views expressed herein are those of PGIM Fixed Income investment professionals at the time the comments were made and 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 an offer to sell or a solicitation to buy any security.
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