Is the U.S. Still Best for Fixed Income?
Is the U.S. the best place to concentrate fixed income holdings over the next 12-18 months? - Paul Sydlansky – John G. Ullman & Associates
In short, yes. We see the U.S. fixed income market outlook as generally quite favorable, despite high investor anxiety. In fact, investor anxiety has created a very opportune environment for bonds.
Sources of anxiety have ranged from fears of the Federal Reserve raising short-term interest rates, to fears a slowdown in China will drag down global growth, to slumping commodity prices. This anxiety pushed spreads wider across the fixed income markets through most of 2015. Some of the spread widening reflects heightened risks in certain industries and issuers that are vulnerable in particular to tighter financial conditions and/or falling commodity price. However, the spreads of a number of issuers, sectors, and countries have widened in sympathy, despite little change in their underlying fundamentals. As a result, spreads on many issues and issuers across market sectors, from investment grade financials and high yield bonds, to structured products and emerging market debt, look very attractive relative to fundamentals.
Furthermore, despite the proximity of a Fed rate hike cycle, we see long-term U.S. rates as likely to remain low and range bound, thanks to the muted global growth and inflation backdrop, as well as the attractive levels of U.S. rates relative to many other developed and developing countries.
As a result, we expect the global reach for yield to continue, and see returns from fixed income as likely to continue to surprise to the upside, especially in the higher-yielding sectors. Furthermore, the confusion caused by the new ultra-low yield market configuration is likely to continue to provide above-average opportunities to add value through active management.
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