Our Multi-Asset Views
Views have a 6−12 month horizon and are those of the authors and Wellington Management’s Investment Strategy team. Views are as of June 2021, are based on available information, and are subject to change without notice. The authors’ process has been updated to incorporate a wider set of inputs from the Investment Strategy team; changes in views will be included again starting next quarter. Individual portfolio management teams may hold different views and may make different investment decisions for different clients. This material is not intended to constitute investment advice or an offer to sell, or the solicitation of an offer to purchase shares or other securities.
Finding Value in Fixed Income
The Fed’s more hawkish stance is likely to keep US long-term interest rates range-bound over our 6- to 12-month time horizon. We expect the Fed and the European Central Bank (ECB) to remain accommodative and to very cautiously begin a tapering process sometime around year-end 2021 or early 2022. Still, we think inflation will increase more than central banks forecast. This could pressure global rates higher, and Europe’s negative rate structure seems particularly vulnerable in the face of accelerating nominal growth.
We think credit valuations are rich, with most spreads well inside of median levels since inception of the indices (FIGURE 4). That said, default rates continue to decline and demand technicals remain strong, driven by demand from Europe and Asia, as well as from US pension funds seeking long-duration3 assets to lock in their improved funded status.
Within credit, we prefer short-duration sectors, such as bank loans and certain areas of the securitized market. We continue to view securitized assets as a way to express a positive view on residential housing, but remain cautious on commercial property, such as malls and offices, where the outlook is more uncertain. Low mortgage rates, declining unemployment, and millennials’ growing demand for housing continue to be potential tailwinds for sectors such as workforce housing and credit-risk transfer. EM debt spreads have lagged the tightening in other sectors. We think the outlook for EM will begin to brighten as these countries receive vaccines and benefit from global growth and stimulus. While EM central banks are actually hiking rates to tamp down inflation, we expect currency gains to contribute to local debt performance.