Developed Market Rates
Looming central bank developments place an emphasis on tactical positioning across the sector.
Underweight MBS vs. rates in early Q4, but more tactical, underweight positioning in 30-year 2% issues after notable underperformance vs. rates. Still focused on specified pools vs. TBAs, while maintaining a 20-year sector overweight vs. the 30- and 15-year sectors. Reducing exposure to GNMAs vs. conventionals.
A mixed view. Credit curves generally remain flat, keeping us wary of generic mezzanine risk. In the event of a risk selloff, perhaps due to a monetary policy error, securitized spreads may generally follow other risk markets. Yet, high-quality securitized products look attractive vs. other spread products, particularly at the front of credit curves. We also see value further down in the capital structure for quasi-private ABS.
Cautiously constructive over the medium and long term. Expect spreads to remain reasonably rangebound with some potential widening toward year end. Still room for spread tightening in select BBBs, financials, and energy.
Global Leveraged Finance
Expect spreads to tighten on the back of lower defaults, improved fundamentals, and the global demand for yield. In the near term, the market could remain volatile. Active credit selection will differentiate performance.
Emerging Market Debt
Credit and issue selection remains paramount. Given the sector’s dispersion, bottom-up fundamental and relative-value focus will identify outperforming issues. Maintaining a high degree of conviction on EM spreads with restrained positioning given the global crosswinds. Local rates and EMFX may perform well, but global conditions suggest limited allocations.
Positive view based on more attractive valuations and a supportive technical environment into year end.
At a glance – PGIM Fixed Income sector views as of October 2021
The full PGIM Fixed Income Outlook 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.