Within credit, we continue to have a neutral stance. While all-in yields are attractive and spreads have widened somewhat recently, they offer limited compensation for downside risks. AI-related capex needs are increasingly being financed through credit markets, with AI-related issuance accounting for a meaningful share of overall year-to-date fixed-income issuance. We’re monitoring the extent to which this creates technical headwinds, AI concentration risk, and greater dispersion across issuers over time. Overall, the risk-reward profile appears balanced, which we think warrants a neutral view.

Geopolitics Muddy the Picture for Commodities

We’ve moved our view on oil from overweight to neutral. Oil markets face a near-term deficit of about five million barrels per day, even as flows through the Strait of Hormuz have increased. Physical energy flows have been more resilient than expected, although diesel and refined-product supplies have been more disrupted. We also expect the market to shift to a surplus over the medium term, while many countries have already drawn down inventories substantially. With geopolitics rather than fundamentals driving the market, the binary nature of the risks limits our conviction. Rates of carry on offer due to a sharply downward-facing futures curve (i.e., the contract price for delivery of oil in the future is lower than the current spot price) are very attractive in our view, but we’re reluctant to lean toward long positions at current oil prices.

We maintain our neutral view on gold. We think the precious metal could play an important role in long-term portfolio construction, particularly as a potential diversifier during periods of dollar debasement. Over the shorter term, however, high real rates and further central-bank tightening present a less favorable backdrop. Turning to flows, ETF demand for gold has recovered from its lows, while central-bank buying remains positive but uneven.

Investment Implications

• Diversification opportunities may be increasing — As the effects of AI, higher oil prices, rising yields, and policy uncertainty create greater dispersion across regions, sectors, and individual securities, we think active positioning may add more value than broad market exposure.

• AI remains a constructive theme, though equity returns may moderate — AI investment and productivity gains continue to underpin our positive view on the economic and earnings cycles, although we believe the pace of earnings could decelerate following a period of exceptional growth. We see more moderate upside for global and EM equities, with earnings remaining the primary driver of returns.

• Duration may warrant a closer look as real yields rise — Markets have shifted from pricing central-bank easing to pricing broadly synchronized tightening, pushing real yields higher. We think this repricing is overdone and has left global government bonds at attractive valuations. Regional divergences in yields may also create opportunities for active positioning.

• Tight spreads continue to favor a selective approach in credit — Spreads have widened somewhat, but we find little value at current levels. We think European credit has better fundamentals than the US in terms of debt service and leverage, and it’s more insulated from significant US issuance. In EM debt, opportunities appear more likely to come from country selection opportunities than broad market exposure.

¹ Spreads are the difference in yields between two fixed-income securities with the same maturity but originating from different investment sectors.

² The term premium is the amount by which the yield on a long-term bond is greater than the yield on shorter-term bonds. This premium reflects the amount investors expect to be compensated for lending for longer periods.

³ Stagflation is an economic cycle characterized by slow growth, inflation, and signs of labor market weakness.

⁴ Capital expenditures are the money a company spends to buy or upgrade long-term assets such as buildings or equipment.

⁵ Carry is the return an investor earns from holding an asset, typically from interest or yield, after accounting for financing or holding costs.

⁶ Duration is a measure of the sensitivity of an investment’s price to nominal interest-rate movement.

Important Risks: Investing involves risk, including the possible loss of principal. • Foreign investments may be more volatile and less liquid than U.S. investments and are subject to the risk of currency fluctuations and adverse political, economic and regulatory developments. These risks may be greater, and include additional risks, for investments in emerging markets or if focused in a particular geographic region or country. • Fixed income security risks include credit, liquidity, call, duration, and interest-rate risk. As interest rates rise, bond prices generally fall. • Investments in high-yield (“junk”) bonds involve greater risk of price volatility, illiquidity, and default than higher-rated debt securities. • Investments in the commodities market may increase liquidity risk, volatility and risk of loss if adverse developments occur. • Investments in the technology sectors may go in and out of favor, which may cause underperformance.

The views expressed here are those of the authors and are based on available information and are subject to change without notice. This information should not be considered as investment advice or a recommendation to buy/sell any security. In addition, it does not take into account the specific investment objectives, tax and financial condition of any specific person. Portfolio positioning is at the discretion of the individual portfolio management teams; individual portfolio management teams and different fund sub-advisers may hold different views and may make different investment decisions for different clients or portfolios. This material and/or its contents are current as of the time of writing and may not be reproduced or distributed in whole or in part, for any purpose, without the express written consent of Wellington Management or Hartford Funds.