Fixed Income Second Quarter Outlook

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

April 23, 2019

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

Early October 2018 was only six months ago, but it may feel even more distant considering the 10-year yields in the U.S., Germany, and Japan were trading around 3.20%, 0.58%, and 0.16%, respectively. At the time, PGIM Fixed Income provided its most recent forecast for the long-term central tendency for G3 rates. While PGIM Fixed Income may not have anticipated reaching these levels as soon as Q1 2019, they arrived amid further evidence of sluggish global economic growth, contained—if not below target—inflation, and significant policy responses by major central banks.

At a glance – PGIM Fixed Income sector views as of April 2019

Sector

Outlook

Rationale

Developed Market Rates

Cautiously positive

Cautiously positive. While certain DM rates could correct slightly following Q1’s significant rally, we expect investors’ search for yield could support yields at their current levels or lower.

Agency MBS

Mildly positive

Mildly positive on MBS vs. rates despite the incoming spring supply and potentially rising prepayments. The outlook hinges on moderately low volatility and support for risk assets. We’re more cautious longer term given the Fed roll off and potential MBS sales.

Structured Products

Positive but selective

Bias remains at the top of the capital structure, which offers high risk-adjusted spreads for fundamentally remote credit risk. Down the capital stack, we are inclined to wait for a better entry point.

IG Corporate Debt

Moderately Positive

Modestly positive near term given favorable fundamentals, healthy technicals, and potential for tighter spreads. Still favor U.S. money center banks. U.S. tax reform remains supportive.

Global Leveraged Finance

Constructive

Constructive on U.S. high yield. We prefer Bs and are taking advantage of the current steepness of the spread curve. In Europe, we are positive in the short term, but cautious long term amid global growth and European political concerns.

Emerging Market Debt

Positive

Positive. With expectations for broadly dovish global central banks, recovering growth in China, and progress on the trade front, EM assets will likely continue performing well. Notwithstanding the strong performance in EM hard currency assets, valuations in select segments remain attractive. EM rates may also benefit from the broader backdrop, and EMFX could perform once U.S. dollar dominance recedes and EM growth outperformance becomes more apparent. We continue to focus on relative value opportunities in EMFX.

Municipal Bonds

Moderately Positive

Moderately Positive. Despite the strong outperformance and relatively rich valuations vs. Treasuries, the positive technical framework is expected to remain in place through Q2, resulting in solid total returns.

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. © 2019 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.

 

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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. © 2019 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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