Global Fixed Income Outlook

U.S. Treasuries

U.S. Treasury yields remain in positive territory, which represents an advantage on the global stage. Most government bond yields in other developed countries are hovering at or below 0%. But given the Fed’s commitment to a “lower for longer” rate policy, we expect the yield on the 10-year Treasury note to linger below the 1.0% level for some time. In addition, the presidential election may be a catalyst for rate moves, particularly if a Democratic sweep appears likely. Markets likely would perceive this as a risk-off event, driving yields lower.

The Fed’s shift to average inflation targeting means the central bank will tolerate periods of higher inflation (more than 2%)—a positive factor for TIPS. Additionally, the massive increase in U.S. debt, a weaker U.S. dollar and onshoring trends among U.S. businesses likely will push inflation higher in the intermediate term. In our view, market-based measures of longer-term inflation expectations (breakeven rates) still don’t adequately reflect this likely outcome. Accordingly, we believe TIPS are attractive.

U.S. Securitized

The economic fallout from the pandemic continues to create challenges for certain segments of the mortgage market. We remain cautious toward credit-sensitive securities, including non-agency commercial mortgage-backed securities, and are focusing on high-quality agency mortgage-backed, asset-backed and credit risk transfer securities.

U.S. Investment-Grade Credit

We remain somewhat defensively positioned within the sector, as spreads have narrowed and valuations appear rich across many issuers. In addition to focusing on high-quality corporate bonds, which the Fed continues to support via quantitative easing, we’re finding opportunities in the new issues market. We’re also purchasing bonds affected by market dislocations. For example, we’re adding select “vaccine credits.” These are securities from issuers that have lagged the recent recovery but should rebound upon approval of a COVID-19 vaccine. Such issuers include those in the travel and leisure industries. We expect corporate credit spreads to remain rangebound in the near term, as demand for credit competes with uneven restarts in parts of the economy.

U.S. High-Yield Credit

We remain selective in our positioning, given lingering economic headwinds. We expect credit spreads to face continued pressure from defaults, downgrades and bankruptcies. Therefore, we’re maintaining our higher-quality bias and seeking to take advantage of select opportunities as they emerge. We’re finding value within the new issues market. We’re focusing on credits we believe can withstand current economic challenges.

U.S. Municipal

We see opportunity and long-term value among general obligation bonds of municipalities with strong balance sheets, ample reserves and high pension funding ratios. We also believe essential service revenue bonds (water/sewer, public power) offer important defensive characteristics. Among credit-sensitive munis, we believe spread levels continue to indicate value. Given their tax advantages, munis tend to garner more attention in election seasons. While it’s impossible to predict the outcome of November’s election, a Joe Biden victory likely would bring higher taxes and greater federal spending. This scenario would favor munis.

European Sovereign

Ongoing central bank stimulus and approval of the European Union’s landmark economic recovery fund (750 billion euros or $820 billion) supports our maintaining a mostly constructive view of European economic recovery prospects. Virus containment efforts have allowed much of Europe to reopen, including schools. At the same time, though, we remain mindful of the slowing pace of the eurozone’s economic recovery. The recent slowdown in high-frequency eurozone data reflects a summer uptick in COVID-19 across the continent—particularly in Spain, Italy and France—curbing economic reopening efforts. The U.K. is also struggling with an uptick in COVID-19 cases.

European Credit

A weak regional economic outlook and global trade policy uncertainty are diminishing the effectiveness of quantitative easing on European risk assets. The combination of fair valuations and negative yields is further dampening our overall sentiment toward the sector. We continue to find value in the financials sector, where we are maintaining an overweight position. We are generally underweighting the more cyclical industrials sector.

Emerging Markets (EM) Debt

The pandemic continues to weigh on EM fundamentals. However, dovish central bank policies in developed markets should continue to support the asset class. We believe the greatest opportunities reside in the local rates segment, where steep yield curves and low inflation remain supportive. We generally favor countries where we believe rates are above their long-term average, including South Africa, Indonesia and Mexico. Among EM external sovereigns, we believe spreads generally remain too tight, given our assessment of fundamentals. We remain cautious toward EM corporate debt securities* due to the potential for downgrades and defaults. However, we recently increased exposure to high-yield corporates due to attractive spread levels.

*Debt security: A debt instrument, including bonds, certificates of deposit or preferred stocks.

Q4 2020 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.

Alternative mutual funds that hold a variety of non-traditional investments also often employ more complex trading strategies than traditional mutual funds. Each of these different alternative asset classes and investment strategies have unique risks making them more suitable for investors with an above average tolerance for risk.

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.

As with all investments, there are risks of fluctuating prices, uncertainty of dividends, rates of return and yields. Current and future holdings are subject to market risk and will fluctuate in value.

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.

Past performance is no guarantee of future results. Mutual fund investing involves market risk. Investment return and fund share value will fluctuate. It is possible to lose money by investing in mutual funds. 

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.

This information is for educational purposes only and is not intended as investment or tax advice.

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