Bonds Still Volatile, Curve at 42-Year Low by Investing.com

Written by Alessandro Albano

Investing.com – After Higher than expected inflation, i US Treasuries posted four consecutive weekly rises, the longest streak since October, as the 2-year/10-year curve reached a new 42-year low of -92 basis points.

In the same period, investment-grade corporate bonds weakened again, resulting in a -22 basis point underperformance of treasury bonds for the same period, to which losses must be added. High-yield corporate bonds.

Below we inform the complete analysis of Anders PearsonChief Information Officer for Global Fixed Income at Nuveen, where various economic scenarios and the impacts on credit markets are examined:

The future of the American economy

The Fed appears to be in the final stretch of its rate-raising cycle, and investors are focusing on the potential effects of higher interest rates on the US economy in 2023. Here are the three most discussed economic scenarios, along with projections of steady economic income.

Soft landingIt’s the Fed’s goal, slowing the economy enough to bring inflation down to around 2% — the central bank’s long-term goal — but avoiding a recession. While the Fed has historically not had success in achieving a soft landing, Chairman Jerome Powell recently said he remains hopeful for a soft landing. This scenario potentially provides the best opportunity for fixed income on a larger scale.

steep dropThe Fed scored a Pyrrhic victory, taming inflation and sending the economy into a severe recession. High-quality US Treasury and corporate bonds (especially long-term securities) can outperform not only riskier fixed-income sectors, such as high-yield debt and large loans, but also stocks.

Landing is prohibited: Economic growth remains strong, and with inflation holding steady, the Fed raises interest rates more than investors or central bankers expected. As interest rates rise, fixed income is likely to suffer, although larger loans can offer some protection thanks to floating rate coupons.

conclusions

The end of US central bank tightening looks near: we expect the Fed to stop raising interest rates early this year. The final level of rates is likely to remain relatively low by historical standards.

The underlying growth outlook remains good as consumers enjoy strong balance sheets, businesses reinvest and Covid subsides. This should keep defaults low

Treasury yields are expected to decline this year and we expect the 10-year Treasury yield to end at around 3.25%.

We prefer a risk averse, credit focused stance with sustainable free cash flows and strong balance sheets across a broad range of sectors. The medium-quality rating segments look particularly attractive. Municipal utility bonds also look attractive.