PGIM Fixed Income 1Q 2020 Outlook

PGIM Fixed Income shares their views on the current economic environment and outlook for fixed income markets.

January 08, 2020

Each quarter, PGIM Fixed Income publishes an outlook describing their views on the economy, as well as their expectations for sectors within fixed income markets. Here’s where they see value (and where they don’t) in the coming quarter.

At a glance – PGIM Fixed Income sector views as of January 2020

PGIM Fixed Income sector views as of January 2020

Sector

Outlook

Rationale

Developed Market Rates

Opportunistic

In the U.S., the Federal Reserve’s presence in the T-Bill and repo markets may move certain interest-rate derivatives closer to fair value from broadly overvalued levels. We anticipate most nominal rate complexes will remain range bound, and a backup in long-term Bund or JGB yields could present buying opportunities. Long-term UK linkers appear overvalued and poised for a selloff.

Agency MBS

Positive

Positive vs. developed market interest rates. Prepayment speeds likely peaked in 2019, hence moving up-in-coupon and away from production coupons generally presents the most attractive trade within the sector.

Securitized Credit

Positive but selective

We continue to view high-quality securitized assets favorably on a relative-value basis and as a diversifier relative to other risk assets. We acknowledge high-quality securitized assets underperformed in 2019. We see mezzanine risk as more vulnerable to slowing fundamentals and are increasingly selective in where we take mezzanine exposure.

IG Corporate Debt

Positive

Near-term positive amid favorable fundamentals, healthy technicals, and potentially tighter spreads. Continue to favor U.S. money center banks and select BBB-rated industrials.

Global Leveraged Finance

Constructive

Solid technicals and relatively stable fundamentals support seeking value in B-rated U.S. high yield, U.S. leveraged loans, and European high yield. The outlook for European loans remains encouraging as well, but close scrutiny of underwriting standards is needed.

Emerging Market Debt

Positive

In a supportive global backdrop with attractive valuations, we favor a barbell position comprised of lower-quality, front-end corporates and sovereigns—possibly in distressed names as well—and higher-quality, longer-dated issues. We are more measured in EM local bonds and are cognizant that our relative value focus in EMFX can become more directional if the U.S. dollar weakens more broadly.

Municipal Bonds

Positive

Strong technical framework and attractive valuations should lead to outperformance vs. Treasuries.

The full PGIM Fixed Income Market Outlook PDF opens in a new window is available for financial professionals.


 

Fixed income investments are subject to interest rate risk, and their value will decline as interest rates rise. Commercial mortgage-backed securities (CMBS) are a type of mortgage-backed security backed by commercial mortgages rather than residential mortgages. They are composed of a variety of loans, each of which represents different property sizes and locations. These loans are pooled and are broken into tranches of risk that are sold to investors. High yield bonds, known as junk bonds, are subject to a high level of credit and market risk. International bonds are bonds issued by foreign corporations or foreign government agencies. Emerging market bonds are local currency bonds issued by emerging market governments. Emerging market countries may have unstable governments and/or economies that are subject to sudden changes. These changes may be magnified by the countries’ emergent financial markets, resulting in significant volatility to investments in these countries. Investment-grade corporate bonds are bonds with a credit rating of AAA to BBB as rated by Standard & Poor’s, or Aaa to Baa as rated by Moody’s. Mortgages refer to mortgage-backed securities (MBS), which are composed of a variety of residential mortgage loans, each of which represents different property sizes and locations. These loans are pooled and are broken into tranches of risk that are sold to investors. Collateralized loan obligations (CLOs) are securities backed by a pool of debt, often low-rated corporate loans. Municipal bonds are tax-exempt bonds with a maturity of at least one year, including state and local general obligation, revenue, insured, and pre-refunded bonds. Unlike other investment vehicles, U.S. government securities and U.S. Treasury bills are backed by the full faith and credit of the U.S. government, are less volatile than equity investments, and provide a guaranteed return of principal at maturity. Asset allocation and diversification do not assure a profit or protect against loss in declining markets. Past performance is no guarantee of future results.

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 investment advice or an offer to sell or a solicitation to buy any securities mentioned herein. Neither Prudential Financial, 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.

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 about managing or investing your retirement savings. Clients seeking information regarding their particular investment needs should contact a financial professional.

PGIM Fixed Income is a unit of PGIM, Inc. (PGIM), a registered investment advisor. PGIM is a Prudential Financial company. © 2020 Prudential Financial, Inc. and its related entities. PGIM and the PGIM logo are service marks of Prudential Financial, Inc. and its related entities, registered in many jurisdictions worldwide.

For Compliance Use Only: 1023985-00003-00 Ed: 1/20

 

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Mutual fund investing involves risk. Some mutual funds have more risk than others. The investment return and principal value will fluctuate and investor's shares when sold may be worth more or less than the original cost. Fixed income investments are subject to interest rate risk, and their value will decline as interest rates rise. Asset allocation and diversification do not assure a profit or protect against loss in declining markets. There is no guarantee a Fund's objectives will be achieved. The risks associated with each fund are explained more fully in each fund's respective prospectus. Consult with your attorney, accountant, and/or tax professional for advice concerning your particular situation.

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 about managing or investing your retirement savings. Clients seeking information regarding their particular investment needs should contact a financial professional.

Investment products are distributed by Prudential Investment Management Services LLC, a Prudential Financial company, member SIPC. Separately Managed Accounts are offered through our affiliates. Jennison Associates and PGIM, Inc. (PGIM) are registered investment advisors and Prudential Financial companies. QMA is the primary business name of QMA LLC, a wholly owned subsidiary of PGIM. PGIM Fixed Income and PGIM Real Estate are units of PGIM. © 2020 Prudential Financial, Inc. and its related entities. Jennison Associates, Jennison, PGIM Real Estate, PGIM and the PGIM logo are service marks of Prudential Financial, Inc. and its related entities, registered in many jurisdictions worldwide.

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