Sector
Outlook
Rationale
Developed Market Sovereign Rates
Enhanced relative-value opportunities
Developed Market Rates
Outlook: Constructive
In a departure from 2021’s heightened volatility, developed market rates should be much calmer in 2022 as market pricings of central bank rate hikes are realized. Low volatility is conducive to relative-value opportunities, and we expect the significant dislocations across global rates to normalize.
Agency MBS
Outlook: Underweight
Still underweight vs. rates. While valuations remain rich, some spread widening is emerging in anticipation of the Fed’s withdrawal, which will shrink TBA demand, lead to a decline in dollar rolls, and pose a headwind for basis performance.
Securitized Credit
Outlook: Constructive
Constructive Stability. High-quality CLO spreads should return their generous carry, CMBS spreads will likely take their cue from IG corporates, housing values appear supportable, and we remain constructive on ABS spreads.
IG Corporate Debt
Outlook: Constructive
Selectively Opportunistic. We continue to favor certain BBB issues for carry and spread compression in deleveraging names. Value remains in select sectors, e.g., U.S. money center banks, and we’re mindful of the sector’s event risk as well as the mounting macro uncertainties.
Global Leveraged Finance
Outlook: Constructive
Cautiously constructive. U.S. and European default rates should remain historically low, and B-rated bonds appear attractive in both asset classes. Ongoing CLO formation and investor concerns about rising interest rates should maintain a bid under leveraged loans. Accurate credit selection remains paramount.
Emerging Market Debt
Outlook: Positive
Attractive for active investors. The context of “good enough” growth with fading headwinds supports our continued preference for hard-currency bonds, increases our interest in EM local-currency issues, and keeps us cautious on EM currencies.
Municipal Bonds
Outlook: Positive
Positive amid strong technicals, resilient credit quality, and stable credit spreads, which are somewhat offset by limited opportunities in the secondary market.
Agency Mortgage Backed Securities (MBS)
Positive
Origination will likely continue declining in early 2023 amid elevated primary rates, and lower volatility could provide additional support. In a recession, MBS could outperform other spread sectors. We are covering underweights in lower 30-year coupons and adding higher 30-year coupons for carry opportunities. We’re trading the 15-year segment opportunistically as we focus on GNMAs and specified pools.
Securitised Credit
Given the relative underperformance of high-quality securitized spreads in 2022, they may provide more than adequate compensation for credit migration protection in 2023. In a recession, we believe high-quality securitized products in the U.S. and Europe will outperform similarly rated credit sectors. Conversely, mezzanine tranches may come under price pressure, which could provide opportunities in lower capital structure bonds later in the year.
Global Investment Grade (IG)
Corporates
Incrementally constructive
As we gain clarity on key macro issues, such initial signs of moderating inflation and reopening in China, we believe investment grade corporate spreads appear attractive from a long-term perspective. Areas of lingering uncertainty may lead to bouts of spread widening—particularly in the first half of the year—which could provide opportunities to add risk.
Global Leveraged Finance
Near-Term Cautious
Recession risk presents a meaningful concern, especially for lower rated credits. We are positioned for further spread widening, but see value in idiosyncratic situations and relative value opportunities. Active management and accurate credit selection will be rewarded given the likelihood for continued volatility.
Emerging Market (EM) Debt
Waning headwinds
Inflation appears to be easing, so the Fed may be nearing its terminal rate. As a result, the U.S. dollar’s strength is abating. The Chinese government is addressing the property sector’s problems and moving away from its zero-COVID policy. Geopolitical tensions are off their late-summer peak but remain high, as do the risks of recession and financial market fragility.
Municipal Bonds
Valuations will be driven by falling rate volatility, attractive yields, and solid credit fundamentals.
At a glance – PGIM Fixed Income sector views:
The full PGIM Fixed Income Outlook (PDF) is available for professional investors.
Each quarter, PGIM Fixed Income publishes an outlook describing their views on the economy, as well as their expectations for sectors within fixed income markets. Here’s where they see value (and where they don’t) in the coming quarter.
Liquidity should continue to improve as rates volatility finally trends lower, leading to ample relative-value opportunities.
Expanding opportunities
Cautiously optimistic
At a glance – PGIM Fixed Income sector views:
Each quarter, PGIM Fixed Income publishes an outlook describing its views on the economy, as well as its expectations for sectors within fixed income markets. Here’s where PGIM Fixed Income sees value (and where it doesn’t) in the coming quarter.