Weekly View from the Desk
PGIM Fixed Income shares their weekly views and outlook for fixed income markets.
After more than a year on pause, and after much anticipation, the Federal Reserve lowered interest rates in September, beginning what is expected to be a period of easing monetary conditions. Treasury yields have trended lower and credit spreads have remained tight in response. Although the Fed anticipates two 25 bps cuts through the remainder of the year and another 100 bps of cuts in 2025, that would still leave the policy rate above the Fed’s terminal rate projection of 2.9%.
The Labour Story Is Driving the U.S. Market
The unemployment rate is rising and traditionally, when the unemployment rate rises, consumption tends to slow. But the U.S. consumer has not been responding in any notable way to the reality that the unemployment rate is up, because they have been working through savings. Should the unemployment rate continue to rise, this may put downward pressure on consumption. We continue to monitor risks associated with a recession, such as the labour market and consumer spending relative to income.
Asset Allocators Can Count On Bonds Again
The allocation to bonds matters in an asset-allocation construct as bonds act as a good shock absorber around equity corrections. In a hiking cycle, cash is where you want to be in the equity downturn. But that is not the case in a rate-cutting environment. There’s a tendency for bonds to deliver solid risk-adjusted returns when they seem cheap relative to equities, as they do today. Although credit markets do not appear cheap from a broad perspective, we see lots of relative value when digging below the surface.
The dispersion in the high yield market is the widest that we’ve seen in several decades. The ability to pick the winners and the losers and to use your credit skills in today’s environment, is as robust as we’ve seen in a very, very long time. Some near-term consolidation is possible. But overall, the favourable outlook for fixed income returns over the intermediate-to-long term remains, thanks to rates and spreads that appear range bound or set to decline from current levels.
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The views expressed herein are those of PGIM investment professionals at the time the comments were made, 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 PFI, 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.
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