Explore Our investment Outlook
While valuations generally remain tight, we continue to find opportunities among investment-grade and high-yield corporate bonds. We are taking advantage of new issuers in many sectors, particularly banking and finance, where our research efforts have uncovered attractive bonds. Our high-yield positioning favors “rising stars” that we believe will benefit from credit rating upgrades. Although we are optimistic overall, we remain mindful of the corporate earnings headwinds from elevated inflation and ongoing supply chain disruptions.
Our current positioning favors structured credit, which we believe offers better yield and total return potential than conventional pass-through mortgage securities. We are focusing on aircraft asset-backed securities, short-structured collateralized loan obligations and specialized commercial real estate securities. We also are finding attractive opportunities among non-QM (qualified mortgage) residential mortgage-backed securities and credit risk transfer securities.
Against a backdrop of Fed tapering, moderate economic growth and elevated inflation, we expect interest rates to head higher and the yield curve to steepen. We expect the Fed to generally remain supportive despite persistent inflationary pressures and the scaling back of quantitative easing. Higher shelter costs and continued supply and demand imbalances likely will keep inflation well above pre-pandemic levels. We believe Treasury inflation-protected securities offer better value than nominal U.S. Treasuries and government agency securities in this environment.
We believe muni market fundamentals remain strong due to economic gains, record fiscal stimulus and unspent aid to state and local governments. Furthermore, passage of the Infrastructure Investment and Jobs Act is a credit positive for the muni market. Against this backdrop, we continue to favor BBB-rated and high-yield municipal bonds. We still believe general obligation bonds are generally overvalued. We favor more credit-sensitive sectors, including hospitals and retirement communities. In our view, these sectors offer value amid fading negative effects from the pandemic.
We generally favor European sovereign bonds over U.S. Treasuries, given expectations for the Fed to raise rates sooner than the European Central Bank (ECB). We are maintaining exposure to peripheral European countries (Italy, Spain, Portugal), which should benefit from sustained aid from the ECB and the European Union. Our European credit exposure remains skewed toward subordinated1 financial bonds and select industrial hybrid securities2. Additionally, we believe Japanese inflation-linked bonds continue to offer value.
We continue to favor select government securities in emerging markets over developed markets government bonds. Steeper yield curves in developing markets and recent weakness among EM bonds are fueling this preference. We’re generally focusing on high-yield EM issuers and select EM currencies. We believe these assets may perform well due to cheap valuations, strong external positioning and current account surpluses, and high commodity prices. In our view, elevated inflation in developed markets also supports our position in EM currencies.
We continue to believe EM corporates provide exposure to positive external sovereign fundamentals at attractive valuations. We believe higher-quality high-yield securities generally offer better value than investment-grade corporates. Given the outlook for rising commodity prices and elevated inflation, our view toward the oil and gas and metals and mining sectors remains positive. We are cautious toward China, given the nation’s slowing growth and ongoing real estate sector challenges. Latin America still has positive valuations and potential for outperformance, but election risk in several countries remains a potential headwind we are monitoring.
1Subordinated security - An unsecured loan or bond that ranks below more senior loans in terms of claims on assets or earnings.
2Hybrid Securities - Financial securities that combine two or more instruments, typically providing both debt and equity characteristics.
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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