Weekly View from the Desk
Evergrande Stumbles Over Three Red Lines
After the COVID-19 pandemic melted markets in early 2020, the U.S. Federal Reserve cut interest rates to near zero and flooded the monetary system with liquidity. Congress also passed over $3.5 trillion in stimulus bills and seeks more in 2021.
These efforts, along with vaccine approvals, drove a spectacular market rebound. Now, many economists are saying that the size of the stimulus coupled with a worldwide vaccine rollout will overheat the global recovery, spiking inflation and forcing the Fed to raise interest rates.
PGIM Fixed Income has a different, longer-term view. While inflation and interest rates may rise in the short term and cause concern for analysts, they likely will drift back to the low levels we’ve seen in recent years, offering significant opportunities for bond investors.
Michael Collins, CFA, Senior Portfolio Manager, addresses this trend in a recent episode of PGIM Fixed Income’s podcast, All the Credit: Investing Through the Arc of the COVID Recovery. “People seem to get overly optimistic during periods of recovery and price in much higher interest rates and levels of inflation, a higher Federal funds rate than ultimately plays out,” said Collins, who also hosted the podcast. “We may be at the start of one of those environments”.
Nathan Sheets, PhD, and PGIM Fixed Income’s chief economist was a guest on the podcast episode, and added that in two to three years he expects a move back into a low-inflation world. Robert Tipp, CFA, and the firm’s chief investment strategist was also a guest, and acknowledged that the market turmoil over the past year has not been a “feel-good environment” for investors. However, he agreed that the Fed likely won’t raise rates in the short term, and that those who remain fully invested in the bond market should benefit.
PGIM Fixed Income’s first-quarter 2021 market outlook emphasizes this theme as well, examining interest rates and inflation from two angles:
PGIM Fixed Income relies on intensive research when making market forecasts. Its research team has long argued that fundamentals warrant a “low-for-long” interest rate environment—and has a history of making accurate forecasts across market cycles.
We invite you to visit our Interest Rates Insights page to learn more about PGIM Fixed Income’s views on the market and what investors can expect next.
These materials are for informational or educational purposes only. The information is not intended as investment advice and is not a recommendation about managing or investing assets. In providing these materials, PGIM is not acting as your fiduciary. Clients seeking information regarding their particular investment needs should contact their financial professional. These materials represent the views and opinions of the author(s) regarding the economic conditions, asset classes, securities, issuers or financial instruments referenced herein. Distribution of this information to any person other than the person to whom it was originally delivered and to such person’s advisers is unauthorized, and any reproduction of these materials, in whole or in part, or the divulgence of any of the contents hereof, without prior consent of PGIM Fixed Income is prohibited. Certain information contained herein has been obtained from sources that PGIM Fixed Income believes to be reliable as of the date presented; however, PGIM Fixed Income 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. PGIM Fixed Income has no obligation to update any or all of such information; nor do we make any express or implied warranties or representations as to the completeness or accuracy or accept responsibility for errors. All investments involve risk, including the possible loss of capital. These materials are not intended as an offer or solicitation with respect to the purchase or sale of any security or other financial instrument or any investment management services and should not be used as the basis for any investment decision. No risk management technique can guarantee the mitigation or elimination of risk in any market environment. Past performance is not a guarantee or a reliable indicator of future results and an investment could lose value. No liability whatsoever is accepted for any loss (whether direct, indirect, or consequential) that may arise from any use of the information contained in or derived from this report. PGIM Fixed Income and its affiliates may make investment decisions that are inconsistent with the recommendations or views expressed herein, including for proprietary accounts of PGIM Fixed Income or its affiliates.
Consider a fund’s investment objectives, risks, charges, and expenses carefully before investing. The prospectus and summary prospectus contain this and other information about the fund. Contact your financial professional for a prospectus and summary prospectus or visit us at www.pgiminvestments.com. Read them carefully before investing.
All investments involve risk, including the possible loss of capital. Past performance is not a guarantee or reliable indicator of future results. Source: PGIM Fixed Income. The information represents the views and opinions of the author, is for information purposes only, and is subject to change. The information does not constitute investment advice and should not be used as the basis for an investment decision.
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.
Fixed income instruments are subject to credit, market, and interest rate. Emerging market investments are subject to greater volatility and price declines.
This material is being provided for informational or educational purposes only and does not take into account the investment objectives or financial situation of any client or prospective clients. The information is not intended as investment advice and is not a recommendation. Clients seeking information regarding their particular investment needs should contact their financial professional.
PGIM Investments LLC is an SEC-registered investment adviser and a Prudential Financial, Inc. company. PGIM Fixed Income is a business unit of PGIM, a registered investment adviser. PGIM is a PFI company. PGIM Investments and PGIM Fixed Income are affiliates.
© 2021 Prudential Financial, Inc. (‘PFI’). PFI of the United States is not affiliated in any manner with Prudential plc, incorporated in the United Kingdom, or with Prudential Assurance Company, a subsidiary of M&G plc, incorporated in the United Kingdom. PGIM and the Rock symbol are service marks of PFI and its related entities, registered in many jurisdictions worldwide.
1046222-00001-00 Ed 03/2021