Explore Our investment Outlook
Corporate fundamentals generally remain attractive, and investment-grade credit spreads remain tight. Nevertheless, we continue to find value among select companies in the finance, airline, leasing, metals and mining and automobile sectors. We are also finding opportunities among lower-quality securities (BB-rated) with credit-upgrade potential. Additionally, we believe the yield advantages of U.S. credit compared with non-U.S. debt securities should continue to fuel demand for U.S. corporate bonds. Strong investor demand in the new-issues market has led to tight spreads. But low event risk and relatively attractive coupons are keeping us active in this market. Meanwhile, event risk, including leveraged buyouts, is rising across many industrials sectors, and we are actively working to avoid such situations.
We recently increased allocations to investment-grade asset-backed securities, commercial mortgage-backed securities, collateralized loan obligations and residential mortgage-backed securities. These are all senior-secured securities (a security that has a higher priority compared to another in the event of liquidation) featuring lender-friendly performance-based tests and offering higher yields relative to investment-grade corporates and agency mortgages (which appear richly valued). Regarding these recent additions, we have primarily focused on the transportation, commercial real estate and restaurant industries, which we believe will benefit as the economy normalizes.
Slowing, yet solid, economic growth has elevated inflation, while accommodative fiscal and monetary support should steadily push Treasury yields higher and steepen the yield curve. As such, we expect the benchmark 10-year Treasury yield to remain below 1.75%. Within the U.S. government sector, we continue to favor Treasury inflation-protected bonds. In addition to solid economic growth, we expect soaring U.S. debt, supply disruptions, strong demand and corporate onshoring trends to pressure inflation, highlighting continued value in inflation protection.
The ongoing U.S. economic recovery, record fiscal aid and direct federal support to state and local governments continue to provide a strong fundamental backdrop for munis. Furthermore, the market continues to benefit from robust investor demand for tax-exempt munis. We believe expectations for higher taxes are already factored into the market. Against this backdrop, we continue to favor BBB-rated and high-yield munis. Among sectors, we believe hospitals and retirement communities offer attractive value, and we expect improving performance as the pandemic’s negative effects subside.
We continue to hold an underweight position in core European government bonds, which still offer unusually low yields. We favor exposure to peripheral European sovereigns, which should benefit from sustained aid from the European Central Bank and the European Union. Additionally, we believe Japanese inflation-linked bonds offer good value.
The potential for accelerating EM growth along with firmer commodity prices and highly accommodative U.S. monetary policy account for our positive outlook for EM debt. We generally favor local rates and currencies over external debt. We believe the recent selloff in local rates has been excessive, and yield curve steepness, particularly in South Africa, Mexico and Indonesia, presents opportunities. We believe EM currencies should continue to benefit from rising commodity prices, ultra-loose monetary policy in developed markets and rising real rates in emerging markets. Within credit, we prefer higher-yielding sovereigns, where valuations appear attractive.
We believe EM corporates can provide exposure to positive external sovereign fundamentals at more attractive valuations. We believe high-yield securities offer better value than investment-grade corporates, and our outlook on the industrial and oil and gas sectors remains positive. We’re also positive on the metals and mining sector, particularly copper and silver, but we remain underweight in financials companies.
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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