Russell Investments: Fixed income managers expect increased inflation to persist

8 juli 2022

Russell Investments’ latest quarterly survey of fixed income managers found most have updated their expectations for U.S. core inflation, including about two-thirds who see it persisting in the 3% to 4.5% range in 12 months. 

Quarterly survey finds managers see U.S. core inflation stuck in 3%-4.5% in 12 months

None of the 59 bond and currency managers who responded to the Q2 2022 survey expect U.S. core inflation to decline below the U.S. Federal Reserve’s (Fed) 2% target in the coming 12 months and less than 5% expect the U.S. Consumer Price Index to show the inflation average below 2% in the next five years.

The survey also found disagreement on when a global recession might begin. 31% of respondents expect it to start next year, while 27% expect it to begin in 2024 and 28% expect it later. While recession is a concern, the survey found the main concern for fixed income managers at mid-year 2022 is stagflation. 58% of respondents selected stagflation as their primary concern, while 21% picked recession.

“Fixed income managers had been surprised by the sharp move higher in interest rates. While concerns exist about the economy, it remains to be seen whether their expectations of moderate deterioration come to fruition or whether another surprise awaits,” said Adam Smears, Head of Fixed Income Research at Russell Investments.

 
Other key findings from Russell Investments’ Q2 2022 survey include:
 

• Investment-grade credit:

Sentiment is changing as 21% of managers now expect a moderate tightening, versus zero at the beginning of 2022. However, 39% of managers still expect a moderate widening in spreads in the next 12 months, versus 54% in the previous survey. Meanwhile, the majority of respondents affirmed that they expect the leverage of U.S. Better Business Bureau (BBB)-rated companies to increase, indicating that the deleveraging trend observed in 2021 has ended. Moreover, the share of managers that consider caution around fundamentals is warranted almost doubled to 40%, surpassing the share of managers that consider spreads compensated to some degree for the deterioration in fundamentals.
 

• Global leveraged credit:

The percentage of managers who expect spreads to widen moderately increased to 52%, increasing from 20% in the Q4 2021 survey and 47% in the Q1 2022 survey. Only 5% of respondents expect spreads to widen significantly. Within this market segment, more managers (37%) favour the multi-credit sector, while the share that favours U.S. high yield bonds decreased to 21% (from 30%). Managers on balance think corporate fundamentals will remain the same (50%), while a sizable 40% believe there will be at least a moderate deterioration.
 

• Emerging markets (EM):

Managers remain constructive on EM currencies, with almost 55% expecting a positive performance for EM currencies in the next 12 months and 80% expecting this over the next three years. Meanwhile, 62% of respondents, down from the previous 70%, indicated that they favour local currency emerging market debt (LC EMD) over hard currency emerging market debt (HC EMD) for the next 12 months. On a regional basis, most investors continue to favour Latin America (72%). The Turkish lira and the Russian rouble remain the least-favoured currencies. Within the hard currency emerging market debt (HC EMD) space, 57% of respondents expect spreads in the HC EMD index to tighten in the next 12 months, increasing from 38% in the Q1 survey. Meanwhile, 11% of managers expect spreads to widen. Managers again expressed preference for Argentina, Indonesia and Egypt as the countries with the highest expected return over the next 12 months. China, the Philippines and Turkey remain the top underweight countries.
 

• Developed markets:

Survey respondents are positive about the U.S. dollar and Australian dollar. The majority of survey participants expect the U.S. dollar to trade on the upper side of parity, between 1.01EUR/USD and 1.05EUR/USD. However, they consider this to be a floor, while they expect the top to stand at 1.15EUR/USD. Meanwhile, 43% of respondents expect the British pound to post the worst performance among the Group of Ten (G10) currencies.
 

• Securitised credit:

35% of managers plan to add risks in their return-oriented securitised portfolios in the next 12 months. The same percentage plan to maintain current positions, while 29% will decrease exposure to risk. When asked about taking a meaningful beta position, 47% said they already have a short bias in their portfolios, up from 9% in the previous survey. Conversely, only 20% already have a long position, down from 73% in the previous survey. Meanwhile, the percentage that expect non-agency spreads to tighten increased from 14% in January 2022 to 30% in June, the percentage that expect spreads to remain range-bound decreased from 43% to 24%, and the percentage that expect spreads to widen increased slightly from 43% to 47%.