Explore Our investment Outlook
We favor sectors and companies with stable cash flows, including securities issued by utilities, real estate investment trusts (REITs), finance companies and life insurance firms. We are also focusing on companies benefiting from the resumption of normal economic activity, including airlines and hotels, and remain active in the robust new-issues market. Investment-grade credit spreads remain tight, but we are finding value among lower-credit-quality securities, particularly those with BBB credit ratings. We’re also finding opportunities among “rising stars” in the BB segment. Improving economic growth, supportive Fed policy and yield advantages versus non-U.S. bonds remain positive influences on U.S. corporates. However, at this point in the credit cycle, event risk for issuers, including leveraged buyouts, is rising across many industrials sectors. Our research team is actively working on avoiding such situations.
We continue to favor collateralized loan obligations (CLOs) and non-agency collateralized mortgage obligations (CMOs). We believe these securities offer higher quality structures and yield advantages relative to agency mortgages, which appear richly valued. In addition, given positive trends in the U.S. housing market (low mortgage rates, favorable supply/demand backdrop), we believe securities backed by residential housing offer value.
Improving economic growth, rising inflation and aggressive fiscal and monetary support should push Treasury yields higher and steepen the yield curve. We expect the benchmark 10-year Treasury yield to settle near 1.75% to 2.00% over the next few months. In this environment, we are underweighting nominal Treasuries in favor of Treasury Inflation-Protected Securities (TIPS). In addition to improving growth, we expect soaring U.S. debt, a weaker U.S. dollar, supply/demand imbalances and corporate onshoring trends to drive inflation higher, highlighting the value in TIPS.
Biden administration proposals for higher taxes and spending should bode well for tax-advantaged municipal bonds (munis). Infrastructure spending should directly benefit municipalities across the country. We believe the higher corporate tax rates to pay for those projects likely would boost demand for munis from corporations looking to ease their tax burdens. Meanwhile, the massive fiscal spending already working its way through the economy, including direct federal aid to state and local governments, is providing support.
Improving growth prospects are pushing government bond yields higher, prompting us to maintain an underweight position in core European government bonds. We favor exposure to peripheral European sovereigns, which should benefit from sustained European Central Bank and European Union aid. Additionally, we are holding an overweight position in European inflation-linked securities amid mounting global pricing pressures. We continue to have a neutral position in European credit.
Within emerging markets, we favor currencies and local rates over credit. We believe EM currencies can benefit from rising commodity prices, rising real rates and reasonable valuations. We also note that EM current accounts are close to record levels, while aggressive fiscal and monetary stimulus in the U.S. argues for dollar deprecation. In local rates, we believe some caution is warranted following the recent rally, but continue to see value in South Africa, China and Mexico.
We have a small position in EM corporates, where we can gain exposure to positive sovereign fundamentals at more attractive valuations. Our largest exposures are in Mexico and Brazil, where sovereign spreads are tight.
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.
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