Survey finds about 70% of managers see U.S. core inflation at 2.5%-3.5% in 12 months
Seattle, March 14, 2022 — Russell Investments’ latest quarterly survey of fixed income managers found most have updated their expectations for U.S. core inflation, including about 70% who see it in the range of 2.5% to 3.5% in 12 months. None of the 60 bond and currency managers who responded to the Q1 2022 survey expect inflation to fall below the U.S. Federal Reserve’s (Fed) target range of 2% in 12 months, and only 9 percent see it in the 2%-2.25% range.
The survey, which was conducted prior to Russia’s invasion of Ukraine on February 24, also found 91% of mangers are extremely confident that the Fed will begin to raise the federal funds rate in March, and 52% of respondents expect the Fed to hike it four times in 2022. In addition, the survey found 59% of managers expect the supply-demand balance of U.S. Treasuries to become less favorable due to the Fed’s tapering.
“Our quarterly survey indicates Fixed Income managers had adjusted their view on inflation as it took a tighter grip on the economy prior to Russia’s invasion of Ukraine,” said Adam Smears, Senior Director, Investment Research - Fixed Income at Russell Investments. “With persistently high inflation pushing the Fed toward raising the funds rate, our survey now shows most managers identify potential policy mistakes by either government or central bank officials as the main source of risk for investment markets.”
Smears added that the quarterly survey revealed a shift in managers’ views on medium-term concerns for the market, as only 26% expressed concern about stagflation (versus 53% in the prior survey). Meanwhile, the percentage of respondents who expect a major repricing of riskier assets in the medium-term jumped to 50% in the Q1 survey from 32% in the previous survey.
Other key findings from Russell Investments’ survey include:
- Investment-grade credit: Managers sense the end of the deleveraging trend that was observed in 2021. Half of respondents affirmed that they expect U.S. BBB-rated companies to keep leverage levels constant, while 61% of respondents also expect European BBB-rated to maintain stable leverage. In addition, the share of managers who believe current spreads compensate for potential risks of deteriorating credit quality, remained stable. However, the share of managers who believe caution should be warranted due to current spreads and leverage expectations continued its downward momentum from 40% in May 2021 to 21% in January 2022.
- Global leveraged credit: Global leveraged managers believe investment upside remains limited with no expectation of spread tightening. Meanwhile, the percentage of managers who expect spreads to widen moderately increased from 20% in the previous survey to 47% in Q1. Conversely, the percentage of survey respondents who expect spreads to remain stable decreased from 80% to 53%.
- Emerging markets (EM): Within local currency emerging market debt (LC EMD), managers remain constructive on the performance of EM currencies, with almost 63% expecting a positive performance in the next 12 months and 59% expecting this over the next three years. Also, 70% of managers indicated they favor Local Currency over Hard Currency for the next 12 months, up from 57% in the previous survey. However, the longer-term attractiveness was subdued as only 58% of respondents indicated a preference for Local Currency instruments, down from 77% in the previous survey.
On a regional basis, most survey respondents continued to favor Latin America (54%), while 40% expect the Turkish lira to be the worst-performing EM currency in 2022 (up from 32% in the prior survey). Interest in the Russian rouble already had dwindled prior to the invasion of Ukraine, as only 19% of survey respondents (versus 37% in the previous survey) expected it to outperform all other EM currencies.
Survey respondents expressed preference for Egypt, Mexico and Ukraine (prior to the Russian invasion) as the EM countries with the highest expected return over the next 12 months, while they listed China and the Philippines as the two least-preferred EM countries.
- Europe & Asia-Pacific currencies: The survey found 22% of managers expect the Japanese yen to post the worst performance among G10 currencies. Meanwhile, only 28% of managers expect the U.S. dollar (USD) to be the best-performing currency, alongside the Australian dollar. Regarding the euro (EUR), two-thirds of managers expect it to trade between 1.11EUR/USD and 1.20EUR/USD. However, most managers expect some bouts of weakness and believe the floor to be between 1.01EUR/USD to 1.10EUR/USD, while 78% of managers do not see it trading above the 1.20EUR/USD level.
Securitized credit: The survey found 43% of managers plan to add risk in the return-oriented securitised portfolios in the next 12-months, up from 19% in the previous survey. Similarly, 43% plan to maintain their current risk level, down from 75%. When asked about taking a meaningful beta position, 67% of managers expressed already having a long basis in their portfolios, up from 27% in the previous survey. Meanwhile, only 14% already have a short position and 21% expect to further add short positions.
In addition, only 14% of respondents expect non-agency spreads to tighten. (versus 50% in the previous survey), while 43% expect spreads to remain range-bound (versus 31% in the previous survey) and 43% expect spreads to widen (versus 19% in the previous survey.)
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 is the world’s seventh-largest investment adviser, with $1.2 trillion in assets under advisement (as of 12/31/2021) and $340.8 billion in assets under management (as of 12/31/2021) 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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