Allocate with conviction across taxable fixed income

Outlook 2024Allocate with conviction across taxable fixed income

The shift in interest rate regimes has reset yields across taxable fixed income. Bonds now offer historically higher levels of income, and higher yields provide an income buffer that did not previously exist. We continue to believe in the value of disciplined but measured added exposure to long-term interest rates. In addition, higher yields mean investors no longer need to reach into opaque, risky areas of the market to generate meaningful income. In our view, there is tremendous value in core bond sectors relative to other segments of the market.

However, as markets are dynamic, we believe it is important to maintain flexibility and allocate with conviction as opportunities arise. A skilled active manager may maximize opportunities across both core and plus sectors.

Fixed income asset-class positioning

Our approach during this uncertain market environment highlights the need to be tactical and flexible in actively taking advantage of opportunities as they arise.

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Duration

With central banks at or near the end of their tightening cycles, we are positive on owning duration given the high carry environment.

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Credit

Spreads have proven resilient recently and while most companies are prepared for an economic slowdown, current valuations are discounting a more optimistic environment than we are expecting.

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Structured securities

Despite ongoing challenges from tighter monetary policy and higher bond yields pressuring mortgage rates, we believe the fundamentals for US housing remain solid. As such we have increased our exposure to mortgage-backed securities (MBS), especially US agency-backed MBS, which offer attractive spreads backed by robust structures and strong credit fundamentals.

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Emerging markets debt

The challenging global economic environment and persistence of US dollar strength continues to weigh on emerging markets debt. Spreads on hard-currency debt remain stable compared with same-rated global credit. We favor corporates with proactive balance sheet management and reform-minded sovereigns with buffers, although valuations remain tight.

Listen to our podcast

How do investors strike a balance during market volatility? Daniela Mardarovici, Co-Head of US Multisector Fixed Income shares the key themes for maximizing fixed income opportunities in the year ahead.

Investment solution to consider

Source: Morningstar. Data as of December 31, 2023 unless otherwise noted. Morningstar ranking is based on Morningstar risk-adjusted return measure that accounts for variation in a managed product's monthly excess performance. Past performance does not guarantee future results.

Outlook 2024 webinar

Hear from our panel of investment experts as they discuss actionable investing ideas that can help investors navigate the uncertainty and capitalize on opportunities in the months ahead.

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Investing involves risk, including the possible loss of principal.

Fixed income securities and bond funds can lose value, and investors can lose principal as interest rates rise. They also may be affected by economic conditions that hinder an issuer’s ability to make interest and principal payments on its debt. This includes prepayment risk, the risk that the principal of a bond that is held by a portfolio will be prepaid prior to maturity at the time when interest rates are lower than what the bond was paying. A portfolio may then have to reinvest that money at a lower interest rate. • High yielding, noninvestment-grade bonds (junk bonds) involve higher risk than investment grade bonds. The high yield secondary market is particularly susceptible to liquidity problems when institutional investors, such as mutual funds and certain other financial institutions, temporarily stop buying bonds for regulatory, financial, or other reasons. In addition, a less liquid secondary market makes it more difficult to obtain precise valuations of the high yield securities. • The Fund may invest in derivatives, which may involve additional expenses and are subject to risk, including the risk that an underlying security or securities index moves in the opposite direction from what the portfolio manager anticipated. A derivatives transaction depends upon the counterparties ability to fulfill their contractual obligations. • If and when the Fund invests in forward foreign currency contracts or uses other investments to hedge against currency risks, the Fund will be subject to special risks, including counterparty risk. • The Fund may experience portfolio turnover in excess of 100%, which could result in higher transaction costs and tax liability. • International investments entail risks including fluctuation in currency values, differences in accounting principles, or economic or political instability. Investing in emerging markets can be riskier than investing in established foreign markets due to increased volatility, lower trading volume, and higher risk of market closures. In many emerging markets, there is substantially less publicly available information and the available information may be incomplete or misleading. Legal claims are generally more difficult to pursue. • IBOR risk is the risk that changes related to the use of the London interbank offered rate (LIBOR) or similar rates (such as EONIA) could have adverse impacts on financial instruments that reference these rates. The abandonment of these rates and transition to alternative rates could affect the value and liquidity of instruments that reference them and could affect investment strategy performance. • The disruptions caused by natural disasters, pandemics, or similar events could prevent the Fund from executing advantageous investment decisions in a timely manner and could negatively impact the Fund’s ability to achieve its investment objective and the value of the Fund’s investments.

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