Survey respondents maintain stable outlook for fixed income assets, prefer higher-yield segments
SEATTLE, November 23, 2021 — Russell Investments’ latest quarterly survey of fixed income managers reveals a majority (55%) expect U.S. inflation to track between 2.26% and 2.75% for the next 12 months, while 20% see it moving above this range. The global survey also revealed a shift in views on timing for the first increase for the U.S. Federal Reserve funds rate. Fifty percent of survey respondents now expect the Fed to make its move in the second half of 2022, versus 80% in the Q2 survey who said they didn’t expect the Fed to begin lifting rates until 2023.
“Inflation proved to have a bigger bite than previously thought, forcing managers to consider the prospect of earlier interest rate rises,” said Adam Smears, Senior Director, Investment Research - Fixed Income at Russell Investments. “However, our survey indicates fixed income managers believe inflation will stay roughly under control in the long term and inflation effects will be transitory. Time will tell if managers have this correct.”
The 53 bond and currency managers who responded to Russell Investments’ Q4 2021 survey also revealed the following views:
- U.S. yield curve: 35% of survey respondents expect a bear steepening of the yield curve in the next 12 months, while 45% expect a bear flattening. “Managers expect movement in the U.S. yield curve but disagree on which end of the curve the impact will be more significant,” Smears said. In addition, 42% of respondents expect the 10-year U.S. Treasury to trade between 1.61% and 2% in the next 12 months, with another 42% expecting rates to trade above 2% in the year ahead. Views are considerably more spread out now versus the previous survey in June, when 72% of managers expected 10-year U.S. Treasury to trade in the narrower range of 1.80% to 2.2%.
- Investment-grade credit: 30% of respondents expect a moderate widening in spreads over the next 12 months, while 60% still see range-bound spreads. In addition, 52% expect the pace of deleveraging to slow down, dropping from 69% in the Q2 survey. Meanwhile, the percentage who believe current spreads compensate for potential risks of deteriorating credit quality declined from last quarter’s survey, and the percentage who believe that caution should be warranted due to current spreads and leverage expectations also decreased. Among regions, Europe (ex-UK) replaced the U.S. as the most attractive for returns.
- Leveraged credit: 80% of managers expect range-bound spreads over the next 12 months. While no respondent expects a tightening of spreads, 20% anticipate a moderate widening. In addition, survey respondents remain constructive on fundamentals: 25% expect material improvement in corporate fundamentals and 60% expect some modest improvement. Accordingly, the survey found reduced expectation for rising defaults as 95% of managers see defaults below their long-term average of 3% (up from 78% in Q2.) Among asset classes, leverage loans ranked as the favored asset class in last quarter’s survey, but they are now ranked equally with both mezzanine collateralized loan obligations and high-yield emerging market bonds. Regarding potential risks, respondents see inflation, rising interest rates and slowing Chinese growth as the most concerning.
- Emerging market (EM) debt - local currency: Managers indicate slightly more concern for EM FX as the percentage with positive views declined to 62% this quarter from 71% in Q2. Furthermore, the weighted expected return for next year has fallen from 5.6% to 3.5%. Among specific currencies, managers expect the Russian ruble, Brazilian real and the Egyptian pound to be the best-performing currencies in the next 12 months, while 32% of managers expect the Turkish lira to be the worst-performing currency.
- Emerging market debt - hard currency: Only 29% of respondents expect spreads in the HC EMD index to tighten in the next 12 months, versus 33% in the Q2 survey, while 17% of managers expect spreads to widen. Regarding specific currencies, respondents listed Egypt, Ukraine and Mexico as the countries with the highest expected return over the next 12 months. China and the Philippines again ranked as the least attractive.
- Currencies: 63% of respondents expect the U.S. dollar to gain value versus the euro and to trade below the current 1.16 EUR/USD exchange rate. In the Q2 survey, about 80% of managers said they expected the pair to trade in the 1.21/1.3 range.
- Securitized credit: The percentage of respondents seeking to reduce securitized risk declined from the Q2 survey, while the percentage slightly increased for those seeking to maintain or add securitized risk. BBB collateralized-loan obligations (CLO) ranks as the most preferred securitized segment, followed closely by BBB commercial mortgage-backed securities. Preference for residential mortgage exposure, which had ranked the highest in the Q2 survey, modestly declined. In addition, 50% of managers expect non-agency spreads to moderately tighten in the next 12 months. Moreover, 31% of respondents expect spreads to be range bound. Managers also expressed more balanced views regarding concerns for the CLO market with 69% mentioning broad risk-off market sentiment as main the risk, followed by underlying loan collateral credit deterioration.
About Russell Investments
Russell Investments is a leading global investment solutions firm with $330.1 billion in assets under management (as of September 30, 2021) and $2.9 trillion in assets under advisement (as of June 30, 2021) for clients in 32 countries. The firm provides a wide range of investment capabilities to institutional investors, financial intermediaries, and individual investors around the world. Building on an 85-year legacy of continuous innovation to deliver exceptional value to clients, Russell Investments works every day to improve people’s financial security. Headquartered in Seattle, Russell Investments has offices in 19 cities around the world, including in London, New York, Tokyo and Shanghai. .
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