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Global Fixed Income Outlook

Q1 2024

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Multi-colored international currency.

Imminent Slowdown Highlights Bond Market Opportunities

We believe the elusive recession will finally emerge in 2024. In our view, the economy’s surprising resilience will give way to the mighty weight of higher interest rates, elevated inflation and tighter lending standards.

Currently, a modest recession seems the most likely outcome. Against that backdrop, U.S. Treasury yields should move lower and credit spreads should likely widen. We expect inflation to moderate, but reaching the Federal Reserve’s (Fed’s) 2% target rate may take time. Ultimately, a contracting economy likely will force the Fed to cut interest rates to help restore growth.

While recessions often trigger market anxiety and uncertainty, they also may reveal some potential silver linings for bond investors. Bonds have historically tended to perform well in periods of falling interest rates, benefiting from the price gains that accompany declining yields. Additionally, investors often retreat to less volatile investments, such as high-quality bonds and cash equivalents, during economic downturns.

History highlights the attractive relative performance bonds have delivered during economic downturns. As shown in Figure 1, bonds have posted gains during recessions since 1973.

Figure 1 | Bond Performance Was Positive in Prior Recessions

Total Return % Annualized

Asset Class

Nov. 1973 to March 1975

Jan. 1980 to July 1980

July 1981 to Nov. 1982

July 1990 to March 1991

March 2001 to Nov. 2001

Dec. 2007 to June 2009

Feb. 2020 to April 2020

Bonds

5.80

8.01

24.76

9.10

6.34

5.46

5.26

Stocks

-13.12

16.39

10.00

7.64

-7.18

-24.17

-9.26

Source: Morningstar Direct. Data as of 12/31/2022. Stock performance is based on the IA SBBI U.S. Large Stock Total Return Index (which tracks the S&P 500® Index), and bond performance is based on the IA SBBI U.S. Intermediate-Term Government Bond Index (which tracks the performance of intermediate-term U.S. government bonds). Past performance is no guarantee of future results.

Focusing on Quality, Duration

As we enter 2024, our broad investment strategy reflects a familiar theme. We remain selective and focused on higher-quality bonds. We also believe extending duration remains a prudent strategy given our outlook for recession.

Here’s where our sector teams are finding opportunities as a slowdown approaches:

U.S. Government Bonds

Treasury yields recently climbed to multiyear highs amid aggressive Fed rate hikes, elevated inflation, strong new issuance and better-than-expected economic data. But easing inflation, slowing Treasury issuance and the Fed's dovish pivot reversed that trend. We expect yields – especially those in the intermediate-maturity range – to continue falling and ultimately stabilize. Therefore, we see value in extending duration.

U.S. Securitized Bonds

We continue to favor short-maturity, senior securitized credit issues offering strong relative value and risk/reward profiles. While we are mitigating exposure to office and retail subsectors of the commercial mortgage-backed securities (CMBS) market, we continue to see value in multifamily housing and select industrial properties. We are avoiding consumer-driven asset-backed securities (ABS) in favor of aircraft and data infrastructure assets. On a relative basis, agency MBS valuations appear compelling, and we believe the sector’s defensive nature makes it an increasingly attractive asset class.

U.S. Corporate Bonds

We plan to maintain a selective, relatively defensive posture given the slowing-growth, heightened-volatility backdrop. We continue to see more value in the banking industry relative to similarly rated sectors. We also favor high-quality bonds in the electric, food and beverage, real estate investment trusts (REITs) and construction machinery industries. In our view, corporate bond valuations don’t reflect tighter lending conditions, underscoring our expectations for wider credit spreads and our stringent security selection process. We continue to seek opportunities offering potential downside protection and low event risk and cyclical exposure.

Municipal Bonds

Our outlook for municipal bonds is relatively upbeat, given the broad asset class’s quality and duration characteristics. We expect municipal credit fundamentals to remain durable, supported by reserve fund balances and conservative budgeting practices. States that rely heavily on personal income taxes will likely continue to experience declining revenues, but we believe most states have adequately prepared. In terms of portfolio positioning, we’re maintaining a slightly long duration. We generally favor higher-quality issuers and sectors and believe security selection remains key to performance, particularly among high-yield issuers.

Money Markets

We don’t foresee any catalysts for the Fed to restart rate hikes. Historically, the Fed has cut rates relatively quickly after reaching the terminal rate. If this trend persists, we expect rate cuts to begin in mid-2024. This increases our focus on locking in yields for longer among Treasury bills and credit securities. Meanwhile, we expect to remain close to neutral on overall Treasury and credit positioning, actively and opportunistically seeking pricing dislocations following the significant rate rally. Looking ahead, we will boost portfolio liquidity early in 2024 to meet money market reform implementation deadlines.

Non-U.S. Developed Markets Bonds

With higher yield levels, our duration positioning is gradually moving toward more overweight global exposure, with our tactical trading adjusting for market conditions. Country duration positioning favors Germany and New Zealand against China and Japan. We believe the Bank of Canada and the European Central Bank are likely finished with their hiking cycles. Elsewhere, the market appears to have fully priced in additional hikes from the Bank of England and the Bank of New Zealand. The Bank of Japan may let rates rise, and China may announce more fiscal stimulus.

Emerging Markets Bonds

Amid heightened global uncertainties, our risk exposure remains at the lower end of our target range, and our sector positioning is close to the benchmark’s. We still expect a better environment for local currency EM bonds than external bonds. We believe some low-beta countries and those with high real rates may outperform. In our view, they will have higher correlation to U.S. duration and more space to ease as recession takes hold in the U.S.

We prefer countries with steep yield curves and real rate cushions, such as Mexico, Indonesia, Brazil and South Africa. We are underweighting China due to expectations for additional fiscal support. We’re cautious toward currency exposure, as a U.S. recession could trigger risk-off investing, making EM currencies sensitive and volatile going forward.

John Lovito
John Lovito

Co-Chief Investment Officer

Global Fixed Income

Charles Tan
Charles Tan

Co-Chief Investment Officer

Global Fixed Income

Explore Our Global Fixed Income Capabilities

References to specific securities are for illustrative purposes only, and are not intended as recommendations to purchase or sell securities. Opinions and estimates offered constitute our judgment and, along with other portfolio data, are subject to change without notice.

International investing involves special risk considerations, including economic and political conditions, inflation rates and currency fluctuations.

Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.

Historically, small- and/or mid-cap stocks have been more volatile than the stock of larger, more-established companies. Smaller companies may have limited resources, product lines and markets, and their securities may trade less frequently and in more limited volumes than the securities of larger companies.

Diversification does not assure a profit nor does it protect against loss of principal.

Generally, as interest rates rise, bond prices fall. The opposite is true when interest rates decline.

Past performance is no guarantee of future results. Investment returns will fluctuate and it is possible to lose money.

The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.