PGIM: Fixed Income 4Q 2024 Outlook
October 25, 2024
Each quarter, PGIM Fixed Income publishes an outlook describing its views on the economy, as well as its expectations for sectors within fixed income markets. Here’s where PGIM Fixed Income sees value (and where it doesn’t) in the coming quarter.
AT A GLANCE – PGIM FIXED INCOME SECTOR VIEWS:
| SECTOR | OUTLOOK |
|---|---|
| DEVELOPED MARKET SOVEREIGN RATES | Tactical and wary. The dynamic between market pricing and our expectations for monetary policy outcomes will continue to provide our direction for global duration positioning. We’re wary of what may surprise markets from here, including the possibility of a renewed focus on deteriorating fiscal situations. |
| AGENCY MORTGAGE BACKED SECURITIES (MBS) | Negative in the short term given tight spread levels. We are still positive over the long term vs. rates given muted net supply expectations even after the Fed’s initial rate cut. We prefer staying long convexity in the form of seasoned 30-year pools. |
| SECURITIZED CREDIT | We continue to favor tranches at or near the top of the capital structure given their attractive relative value and risk-adjusted return potential. We expect spreads to remain range bound around historical averages, making carry the dominant theme. While strong technicals could lead to further spread and credit curve compression, we are positioning in shorter spread duration at/near the top of the capital stack, while also remaining tactical and extremely selective regarding more credit-sensitive investments throughout the capital structure. Credit curves appear too flat, and the downside risks associated with traveling indiscriminately down the capital stack outweigh the potential rewards. |
| GLOBAL IG CORPORATES | U.S and European IG corporate yields have come off their YTD peaks as the market has anticipated and priced in monetary policy easing. Demand should remain consistent, but lower yields, generally tight spreads—with Euro spreads continuing to trade solidly wide of the U.S.—and heavy issuance may limit an increase in demand. Given our continued expectations for moderating economic conditions, we are modestly constructive on the sector in the short term but remain mindful of the downside risks. |
| GLOBAL LEVERAGED FINANCE | Solid technicals, stable fundamentals, and a low chance of recession should keep spreads rangebound and demand for new issuance robust. Given elevated geopolitical risks, we remain focused on adding high-quality issues with a preference for short duration. Careful credit selection and a focus on relative value opportunities should be rewarded. |
| EMERGING MARKET (EM) DEBT | Constructive, while mindful of uncertainty related to the U.S. election and policy outcomes. Performance dispersion between and within EMD sectors will continue to reveal alpha opportunities. Our base case of an orderly economic slowdown, accompanied by the tailwind of lower global rates, calls for a moderate level of risk in spreads and EMFX, with a higher conviction in local rates. |
| MUNICIPAL BONDS | As a late-cycle beneficiary of a slowing economy, we are positive on the muni market to finish out the year. Whether the Fed continues to cut rates aggressively or moderately, further policy easing should create a favorable environment for munis. We believe relative value, which has cheapened due to the heavy supply over the past quarter, will continue to support the market. |
SOURCE: https://www.pgim.com/investments/outlook/pgim-fixed-income-4q-2024-outlook