A light at the end of the tunnel

In its 3Q 2020 outlook, PGIM Fixed Income shares their views on the current economic environment and outlook for fixed income markets.

July 28, 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 July 2020

PGIM Fixed Income sector views as of July 2020




Developed Market Rates


Constructive on U.S. duration amid a steep term premium and expectations that a gradual economic recovery will prompt the Fed to maintain a highly accommodative policy stance for the foreseeable future. Consistent demand continues to anchor core European rates.

Agency MBS


Attractive relative to intermediate Treasuries. Likely to underperform other spread sectors as investors continue to search for yield with an ongoing, gradual economic recovery. Lower coupon 30-year TBA issues offer attractive carry vs. rates amid favorable valuations. We maintain a focus on specified pool in bonds away from Fed purchases.

Securitized Credit


High-quality spreads may revisit their post-crisis tights, yet mezzanine risk faces challenging fundamentals, particularly for CLOs and CMBS with high retail and hospitality exposures. Marginally more constructive on consumer and commercial ABS and high-quality RMBS. As the U.S. election approaches, securitized assets may outperform given the reduced vulnerability to corporate tax and regulatory policy.

IG Corporate Debt


Positive in light of central bank support and the prospects of an economic recovery. Favor U.S. money center banks as well as select BBB-rated issues, cyclical credits, and fallen angels.

Global Leveraged Finance


Spreads appear attractive vs. historic averages and will drive strong returns for investors with longer-term time horizons. Over the near term, the market may remain volatile (but relatively range-bound) amid virus concerns. Active credit selection will be a differentiating factor between managers in volatile markets.

Emerging Market Debt


We continue to find value in EM spreads. Many issuers pre-funded anticipated deterioration in economic conditions and fiscal slippage. Spreads for certain EM sovereign and corporate issuers across the credit spectrum are likely to tighten. Further alpha in local rates may emerge from curve positioning as well as in markets with positive real rates and expectations for policy rate cuts. We are more cautious on EMFX and recognize attractive relative-value opportunities between variously affected currencies.

Municipal Bonds


A constructive backdrop amid attractive valuations for many market segments and supportive technical conditions. Yet, a near-term cautious view is warranted given the recent spike in U.S. COVID cases. Without additional near-term federal support for states and localities, the sector could experience an increase in volatility.

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. Clients seeking information regarding their particular investment needs should contact their financial professional.

PGIM Fixed Income is a unit of PGIM, Inc. (PGIM), a registered investment advisor and 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.

1023985-00005-00 Ed: 7/2020



Prudential Financial, Inc. 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.

Investment Products: Are not insured by the FDIC or any other federal government agency, may lose value, and are not a deposit of or guaranteed by any bank or any bank affiliate.