Global Fixed Income Outlook

Explore Our investment Outlook

Investment Outlook: Global Fixed Income.

U.S. Credit

Current valuations do not fully reflect heightened volatility, highlighting the importance of security selection and sector rotation. We favor the BBB quality segment and sectors exposed to minimal event risk, including real estate investment trusts (REITs), financial companies and life insurers. In the high-yield segment, we favor rising stars in the media and commodities sectors. Overall, we believe credit fundamentals remain sound, but rising inflation and supply chain disruptions are increasingly weighing on corporate margins. Geopolitical events may further aggravate these headwinds.

U.S. Securitized

Our current positioning favors structured credit, including floating-rate commercial mortgage-backed securities (CMBS), collateralized loan obligations (CLOs) and credits related to secular growth and recovery trends. For example, we are focusing on securities positioned to benefit from data storage demand and air travel. We continue to underweight agency mortgage-backed securities and have reduced exposure to residential credit. We believe Fed tightening and shifts in central bank balance sheet policy may adversely affect these market segments.

Investment Outlook: Global Fixed Income.

U.S. Government

With the economy growing, the Fed tightening monetary policy and inflation remaining elevated, Treasury yields are heading higher. In the short-term, we expect the yield curve to exhibit a flattening bias, as short-maturity yields respond to a hawkish Fed. In addition to accelerating its rate-hike timetable, the Fed may have to aggressively reduce its balance sheet to achieve its inflation and growth objectives.

Higher shelter costs and ongoing supply and demand imbalances should keep inflation well above pre-pandemic levels. We believe Treasury inflation-protected securities (TIPS) offer better value than nominal U.S. Treasuries and government agency securities in this climate. 

Investment Outlook: Global Fixed Income.

U.S. Municipal

Despite the Fed’s shift in monetary policy, we believe municipal (muni) bonds still offer attractive performance potential versus Treasuries. Given the rising rate backdrop, we favor a neutral to slightly short duration position. We also plan to maintain ample liquidity to take advantage of market opportunities as they arise. Strong muni market fundamentals continue to promote tight valuations across many sectors. In our view, credit-sensitive sectors, including hospitals and retirement communities, offer value as many pandemic-related challenges fade. Additionally, we favor land-secured bonds, which should benefit from robust demand for housing.

Non-U.S. Developed Markets Debt

We continue to favor European sovereign bonds over U.S. Treasuries. Despite record-high inflation in Europe, the European Central Bank (ECB) remains dovish. Russia’s invasion of Ukraine means heightened volatility for European risk assets. We believe the conflict will be contained within Ukraine, thereby limiting longer-term implications for European corporates. Among businesses exposed to the region, we have adjusted credit valuations and our exposures. Overall, we have an underweight position in European credit. We favor more volatile subordinated bonds, including financials and select industrial firms. We also have an allocation to peripheral European countries (Italy, Spain), which should benefit from sustained ECB and European Union aid. Recent earnings results support our view that credit fundamentals have remained stable as the economy emerges from the pandemic.

Emerging Markets

Emerging markets debt (EMD) had already faced a challenging start to 2022, with faster U.S. inflation and the prospect of higher interest rates causing volatility. Russia’s invasion of Ukraine, and the resulting sanctions by the U.S. and its allies, caused further weakness across EMD. They also led to a collapse in the valuation of Russian debt and the ruble. The situation remains highly fluid and uncertain, with the potential for a further escalation.

The war in Ukraine will undoubtedly continue to dominate headlines for the foreseeable future. However, we believe EM investors today are more sophisticated and better able to differentiate between the diverse regions represented in the EMD universe. Although near-term challenges are very real, we believe the fundamental conditions exist for improved performance later in the year. The growth differential between EM and developed markets should improve significantly in 2023. Firm commodity prices should benefit EM exports in aggregate, albeit with significant regional variance. And several EM central banks have already raised interest rates to try to control inflation.

Q2 2022 Investment Outlook Resources

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.