Sector
Outlook
Rationale
Developed Market Rates
Investors often see tightening cycles as high-volatility events for sovereign rates, but history has shown that implied volatility declines steadily until borrowing costs peak. As such, we remain convinced of the unprecedented return potential of relative-value opportunities.
Agency MBS
Underweight
While we remain underweight MBS due to tight valuations and nascent signs of spread widening in anticipation of tighter Fed policy, we recognize that peaking volatility, reduced origination, and slower prepayment speeds may support the sector.
Securitized Credit
While the sector remains susceptible to macro developments, fundamentals remain favorable. Higher rates should curtail issuance and temper asset prices appreciation across residential and commercial real estate. Market volatility has reduced secondary market liquidity and improved valuations across the capital stack. We are tactically adding exposure in high-carry, short spread-duration opportunities.
IG Corporate Debt
Cautious
Given the potential for further, but more modest, spread widening, we’re seeking alpha generating opportunities in select sectors and individual credits. The green energy transition likely accelerates going forward.
Global Leveraged Finance
Despite strong fundamentals, uncertainty around developments in Ukraine, inflation, and central bank hawkishness raise longer-term concerns. Loans should outperform bonds in the short run given continued CLO formation and insulation from rising rates. Active management and accurate credit selection will be rewarded as volatility continues.
Emerging Market Debt
Current price levels have, in the past, signaled opportune entry points in EM bonds, particularly for investors who generate returns through credit selection. But we remain cautious as further developments may continue to impact EM economies. Even in a more negative scenario, we see select opportunities among EM hard-currency bonds. Local-currency yields are set to remain high, so we are focused on specific yield curve and relative-value positions. We also remain cautious on EM currencies with a long U.S. dollar bias and focused on relative value.
Municipal Bonds
Constructive
We continue to expect short-term volatility but see an inflection point approaching as technicals turn and credit fundamentals remain strong.
At a Glance – PGIM Fixed Income Sector Views as of April 2022
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.
Opportunistic
Opportunistic
Cautious
Cautious