Russell Investments survey: Fixed income managers expect full economic recovery by 2022

76% of managers expect U.S. inflation to hover near the Federal Reserve’s target rate

Seattle, March 23, 2021 — Russell Investments’ latest quarterly survey of fixed income managers found 57% expect the global economy will revert to pre-pandemic levels in 2022 and 42% predict it to occur in the first half of the year. The 50 bond and currency managers who responded to the Q1 2021 survey also expect investment grade assets will offer the most attractive risk-adjusted returns over the next 12 months, and managers are tilting toward high-yield assets and, more recently, toward emerging market (EM) debt in local and hard currency. 

“Our quarterly survey indicates fixed income managers are more optimistic about the speed of economic recovery, apparently embracing the supportive confluence of vaccines, fiscal spending and easy money supply to support asset prices,” said Adam Smears, Senior Director, Investment Research - Fixed Income at Russell Investments. “However, the survey also highlights continued expectations for a benign interest rate and inflation environment, which could come under pressure following the $1.9 trillion spending package announced in the United States.”

Other key findings include:

  • Investment-grade credit: Nearly 60% of respondents expect spreads to remain rangebound between plus or minus 10 basis points, while 38% expect a moderate tightening. In the previous quarterly survey, 67% of respondents expected spreads to tighten over the next 12 months. The Q1 survey also found that most managers believe leverage of investment-grade corporates will decline or remain stable in the short- to mid-term, and more (35%) mentioned caution is warranted in terms of whether current spreads compensate for current risks, increasing from 14% in the previous quarter. 

    Regarding their perspective on regions and sectors, managers continue to favor the U.S. as offering the most attractive return potential, but this quarter the U.S. is more closely followed by emerging markets. Meanwhile, survey respondents continue to expect financials to offer the most attractive returns over 12 months, while cyclicals improved their standing with respondents.
  • Leveraged credit: Half of respondents expect rangebound spreads over the next 12 months (up from 33% last quarter), while 39% expect a moderate tightening of spreads. Almost 80% of respondents expect a moderate improvement in corporate fundamentals, which is 40 percentage points higher than the previous quarter. In addition, return expectations continue to decline as 61% of managers expect U.S. high yield to return between 4-5%, which is down from 5-6% in the previous survey.
  • Interest rates: Managers expect the U.S. 10-year Treasury curve to steepen during the next 12 months, and 76% expect U.S. inflation to hover between the U.S. Federal Reserve’s (the Fed) target rate of 1.8-2.4%. Only 10% see a deflationary environment ahead, versus 21% who reported that view in the previous quarter’s survey. Regarding the next Fed funds rate hike, 36% don’t expect it before 2023 and 40% don’t expect it before 2024.
  • Emerging market debt - local currency: Managers expressed a more constructive view regarding performance of developing country currencies versus the 4Q20 survey, with almost 89% expecting EM currencies to provide positive returns over the next 12 months. Almost 40% of managers expect developing country currencies to post strong positive returns in the next 12 months, and only 4% expect these currencies to be a detractor. In addition, managers expressed a preference for the Brazilian real as the most attractive currency over the next 12 months.
  • Emerging market debt - hard currency: Managers remain bullish but have less aggressive views on hard currency emerging market debt (HC EMD). 74% of respondents expect spreads in the HC EMD index to tighten in the next 12 months but their weighted-average expected return stands at 4.7% for the period, which is one percentage point lower than the 4Q20 survey. Managers continue to see Mexico, Ukraine and Brazil as the countries with the highest expected return potential in this space over the next 12 months, while China and the Philippines continue to be viewed as the top two underweighted countries. 36% of respondents noted they have more than 15% exposure to EM HC Corporates, reflecting the second-highest level since the quarterly survey was initiated in 2016.
  • Currency: Expectations for the Euro are narrower, with 61% of managers expecting the Euro to trade in the 1.21-1.25 range. In our 4Q20 survey, 73% of managers expected the euro to be in the 1.21-1.30 range. Managers expressed more consensus with a tilt towards appreciation of the British pound with 77% of respondents expecting it to be in the 1.36-1.50 range over the next 12 months. In our last survey, 80% of managers expected the British pound to be in the 1.26-1.45 range.
  • Securitized credit: 31% of managers indicated they will add risk in return-oriented securitized portfolios over the next 12 months, dropping from 38% in the 4Q20 survey, while 63% said they plan to maintain current risk. When asked about taking a meaningful beta position, 64% indicated they already have a long basis in their portfolios, dropping from 44% in the 4Q20 survey, while 21% of managers expect to add a short position. None expressed this view in the 4Q20 survey.


About Russell Investments
Russell Investments is a leading global investment firm providing tailored solutions and services to institutions and individuals through financial intermediaries. Russell Investments is dedicated to improving people’s financial security, leveraging an 84-year client-centric heritage rooted in investment innovation. Since 1985, for example, with the launch of our first tax-exempt bond fund, the firm has been helping investors grow after-tax wealth. Russell Investments is the fifth-largest adviser globally with $323.7 billion in assets under management (as of 12/31/2020) and $2.5 trillion in assets under advisement (as of 6/30/2020) for clients in 32 countries. Headquartered in Seattle, Washington, Russell Investments operates through 18 additional offices in major financial centers such as New York, London, Tokyo and Shanghai.

Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional. 

Steve Claiborne, 206-505-1858,