CONTRIBUTORS
Sonal Desai, Ph.D.
Chief Investment Officer,
Portfolio Manager
Nikhil Mohan
Economist
Franklin Templeton Fixed Income
Angelo Formiggini
Economist,
International Research Analyst
Patrick Klein, Ph.D.
Director of Multi-Sector Strategy,
Portfolio Manager
United States
John Beck
Director of Global Fixed Income,
Portfolio Manager
United Kingdom
David Zahn, CFA, FRM
Head of European Fixed Income,
Portfolio Manager
United Kingdom
This publication is a complement to the 3Q24 Franklin Templeton Fixed Income Macro Views.
Executive summary
Central-bank action remains paramount for investors. The European Central Bank (ECB) has already embarked on its monetary policy loosening. Incoming US economic data has been a bit softer and is starting to show a cooling—likely welcome news for the US Federal Reserve (Fed) as it gives it more space to commence on an easing cycle. However, we feel this next rate-cutting cycle will be shorter and shallower than the market expects.
Although spreads in some sectors reached near 20-year lows, an allocation to fixed income continues to make sense given the high yields and income provided by high-quality, short-maturity securities.
In this issue, we look closely at the following themes and provide our outlooks for fixed income sectors:
Portfolio themes
- Technical tailwinds: Fixed income markets are enjoying strong technicals.
- Stay nimble, stay quick: Although volatility in the US Treasury market has trended lower, it remains well above historical averages, calling for us to take a more tactical approach with our duration positioning.
- Look for lagging sectors: Rising tides do not necessarily raise all boats. There are sectors that have not fully participated in the strong returns seen year-to-date.
Read the full paper to learn more.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls. Low-rated, high-yield bonds are subject to greater price volatility, illiquidity and possibility of default. Floating-rate loans and debt securities are typically rated below investment grade and are subject to greater risk of default, which could result in loss of principal. Asset-backed, mortgage-backed or mortgage-related securities are subject to prepayment and extension risks.
International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. To the extent the portfolio invests in a concentration of certain securities, regions or industries, it is subject to increased volatility.