Market Outlook

Soaring mortgage rates have massively reduced prepayment risk, creating one of the most compelling entry points for GNMA bonds in more than 20 years.

For all the gloomy talk about the economy in 2023, stabilizing interest rates could be a bright spot for investors. But with imbalances lurking in the shadows, 2023 could be the year for higher-quality bonds, select large- and small-cap stocks, and private-market investments.

Eyes remain firmly on the Federal Reserve, which has engineered a landscape of materially higher real and nominal rates.

The repercussions of US midterm elections will be felt over the coming months and years, not days. The key is how the results are transmitted to the economy, chiefly through monetary and fiscal policy.  

With many aspects of the US economy in decent shape, we believe spread widening in a recession is likely to be limited. Still, investors no longer need to overreach on risk.

We expect inflation to ease despite a surprisingly high CPI reading for August, allowing the Federal Reserve to temper its aggressive pace of rate increases.

Risks are rising: the Fed must thread a narrowing needle-eye to stop inflation without causing a recession. We’ve lightened equity positioning and reduced risk within fixed income segments of portfolios.

These are the six major themes influencing positioning across our fixed income portfolios for the second half of 2022.

Now that yields have reset higher, bonds are positioned to protect portfolios while delivering higher income.

As investors grapple with a new era of macroeconomic uncertainty, liquidity is king in the near term.