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Recession Angst Vs. Recession Realities: Fixed Income Outlook 4Q19

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Includes: AGZ, AWTM, BBSA, BIL, BKT, CLTL, DFVL, DFVS, DLBS, DTUL, DTUS, DTYL, DTYS, EDV, EGF, FIBR, FLAT, GBIL, GNMA, GOVT, GSY, HYDD, IEF, IEI, IVOL, LDSF, LTPZ, MBB, OPER, PBTP, PLW, PST, RINF, RISE, SCHO, SCHP, SCHQ, SCHR, SHV, SHY, SPIP, SPMB, SPTI, SPTL, SPTS, STIP, STPP, STPZ, TAPR, TBF, TBT, TBX, TDTF, TDTT, TFLO, TIP, TIPX, TIPZ, TLH, TLT, TMF, TMV, TTT, TUZ, TYBS, TYD, TYNS, TYO, UBT, USFR, UST, USTB, VGIT, VGLT, VGSH, VMBS, VRIG, VTIP, VUSTX, ZROZ
by: Neuberger Berman
Summary

While intermediate-term political risks should cap growth rates, our judgment is that the shift to more dovish global monetary policy continues to support soft-landing scenarios across a range of countries.

In an environment of central bank easing, floating-rate credit instruments are cheap.

In a world of low growth and investment focus on currency-hedged yields, there’s limited ability for U.S. interest rates to separate from their European counterparts.

RECESSION ANGST VS. RECESSION REALITIES

Global growth have been at the center of investor worries, but in some geographies, this is currently more a function of anticipation than hard data. Looking into the fourth quarter of 2019, we would break the world into two groups. Europe and some major emerging markets are seeing weak growth that feels like recession, while the U.S. and other major countries are more at risk of confidence shocks that could overwhelm reasonably strong fundamentals. With our continued overall expectation of a global soft landing, we provide details on our investment views.

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Investment Implications

We see potential for a global soft landing that supports a range of risky assets, but the picture is mixed: Although slow-but-positive growth should prevail in the U.S., other regions and countries face more risk. In such an environment, we see a number of key themes.

Credit markets still show potential. Valuations are less compelling than at the start of 2019, but stable growth and dovish central banks create a continued tightening bias, providing scope for performance potential for credit with continued dispersion.

Relative value in U.S. credit. After favoring increased exposure to European and emerging market credit over the past 18 months, we now believe value is centered in U.S. credit markets—due both to the growth outlook and valuations after European credit gains.

Floating-rate sector opportunity. Investors have been shunning bank loans, floating-rate corporate investment grade bonds and certain structured product investments. The now relatively attractive credit risk premiums, which coupled with longer-duration instruments, can create attractive portfolios.

Link between U.S. and global rates. With low growth and investor focus on currency-hedged yields, U.S. intermediate and long rates continue to be heavily influenced by global rates, particularly in Europe and Japan. Even if global rates are stable, they hardly represent value given continued purchases for portfolio diversification and hedging benefits.

Market focus on politics, policy. Brexit will likely be a source of volatility, while the Fed could provide more clarity on how it balances U.S. economic trends and easing pressure of other central banks. The fourth quarter could introduce the 2020 U.S. election as a risk factor for markets.

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*Views expressed herein are generally those of the Neuberger Berman Fixed Income Investment Strategy Committee and do not reflect the views of the firm as a whole. Neuberger Berman advisors and portfolio managers may make recommendations or take positions contrary to the views expressed. Nothing herein constitutes a prediction or projection of future events or future market behavior. Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed. See additional disclosures at the end of this material, which are an important part of this presentation. Currency views are based on spot rates, including carry.

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The views expressed herein are those of the Neuberger Berman Fixed Income Investment Strategy Committee. Their views do not constitute a prediction or projection of future events or future market behavior. This material may include estimates, outlooks, projections and other “forward-looking statements.” Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed. This material is being issued on a limited basis through various global subsidiaries and affiliates of Neuberger Berman Group LLC. Please visit www.nb.com/ disclosure-global-communications for the specific entities and jurisdictional limitations and restrictions. The “Neuberger Berman” name and logo are registered service marks of Neuberger Berman Group LLC.

This material is being issued on a limited basis through various global subsidiaries and affiliates of Neuberger Berman Group LLC. Please visit www.nb.com/disclosure-global-communications for the specific entities and jurisdictional limitations and restrictions.

The “Neuberger Berman” name and logo are registered service marks of Neuberger Berman Group LLC.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.