Russell Investments’ survey: Fixed income managers see resilient fundamentals amid headwinds

Majority of survey respondents expect inflation to remain above 2.5% over the next five years

SEATTLE, December 13, 2022 — Russell Investments’ latest global survey of fixed income managers found most respondents (79%) expect the U.S. Consumer Price (CPI) inflation rate to average above 2.5% over the next five years with less than 5% expecting CPI inflation to average below 2% over five years. In addition, none of the 59 bond and currency managers who responded to the Q4 2022 survey expect U.S. core inflation to decline below the U.S. Federal Reserve’s (Fed) 2% target in the coming 12 months.

The survey also found 53% of respondents expect the U.S. 10-year Treasury to trade above 3.75% in a range up to 4.5% in 12 months. 56% also expect the Fed to reduce its balance sheet by $1.25 trillion to $2.25 trillion through the current tightening cycle. 90% of respondents said they already consider liquidity conditions to have deteriorated.

“The end of loose monetary policy is truly over. Credit markets had been accustomed to low interest rates but now face headwinds with inflation, higher rates and slowing growth,” said Adam Smears, senior director, Investment Research - Fixed Income at Russell Investments. “Survey participants expressed more concern for inflation than for recession, but we’d caution that rarely does the Federal Reserve engage on tightening bias without triggering some form of recession. Should the economy evolve negatively in line with previous hiking cycles, managers may find themselves offside.”

Smears added that amid this macroeconomic environment, the team’s survey found fixed income managers believe credit fundamentals will be resilient.

Other findings from Russell Investments’ Q4 2022 survey include:

  • Investment-grade credit: 58% of respondents expect a moderate widening in spreads in the next 12 months, up from 39% in 2Q 2022 and up from 30% a year ago. Meanwhile, only 13% of respondents expect a significant tightening. There has been a deterioration of expectations regarding the evolution of credit metrics, as 79% of managers indicate they expect the leverage of lower quality IG credits in the U.S. to deteriorate amid a weakened economic environment. Regarding Europe, 83% of managers expect leverage metrics to decline.

    Respondents cited their main concern is inflation (88%), which leads to more restrictive monetary policies. Moreover, a recession in the U.S. is also at the forefront of investors’ concerns (71%). Concerning Europe, investors are not expecting the conflict in Ukraine to further escalate (33%).
  • Global leveraged credit: 53% of survey respondents expect spreads to further widen in the coming 12 months, albeit moderately. Respondents remain relatively confident on issuers credit stance, with the vast majority (89%) expecting only a moderate deterioration in overall corporate fundamentals amid the challenging economic environment.

    Within this space, 37% of respondents favor global high-yield bonds, up from the previous survey’s 32%. In contrast, U.S. leveraged loans continue to rank as the least-favored product. The survey also found that concerns of defaults have increased, as 70% of respondents indicated they expect defaults to stand between 3% and 5%. In the previous survey, 70% of respondents expected defaults to remain below 3%.
  • Emerging markets (EM): Managers remain neutral on the performance of EM currencies, with 53% expecting a positive performance of EM currencies in the next 12 months, while 82% expect this over the next three years. 75% of managers think current rates are at a relatively cheap level. In addition, 75% of managers indicated they favor local currency over hard currency for the next 12 months, up from 62% earlier in the year.

    Considering regions, respondents expressed very positive views on Latin America, with 87% of managers reporting it as their most favored region (increasing from 72% in the previous survey and 57% from one year ago.)
  • Currencies: The majority of survey respondents (75%) expect the U.S. dollar (USD) to trade between 0.96 EUR/USD and 1.05 EUR/USD. However, 20% see potential for it to trade up to 1.15 EUR/USD. Moreover, respondents do not expect the currency to break the 0.91 EUR/USD mark.

    The survey also found 63% of managers expect G10 implied volatility to decrease in the next 12 months, a reversal from the previous survey in which the majority expected it to increase. One year ago, all managers expected G10 implied volatility to increase. The same occurred for EM currency implied volatility. Respondents also expect the USD to post the worst performance among G10 currencies, followed by the British pound and Japanese yen.
  • Securitized credit: Two thirds of survey respondents indicated they seek to maintain their current risk position, with another third indicating that they seek to add risk. This contrasts with the previous survey when 35% of respondents indicated they were seeking to reduce risk. Moreover, all respondents showed interest in mortgage beta, with 60% indicating that they are already long, while the remaining 40% indicated interest in adding.

    Survey respondents also expressed balanced concern about underlying loan collateral credit deterioration, with 64% considering it to be their main concern.


About Russell Investments
Russell Investments is a leading global investment solutions firm providing a wide range of investment capabilities to institutional investors, financial intermediaries, and individual investors around the world. Building on an 86-year legacy of continuous innovation to deliver exceptional value to clients, Russell Investments works every day to improve the financial security of its clients. The firm has $274.3 billion in assets under management (as of 9/30/2022) for clients in 32 countries. Headquartered in Seattle, Washington, Russell Investments has offices in 19 cities around the world, including in New York, London, Toronto, Tokyo, and Shanghai.  

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