SEATTLE – (COMMERCIAL THREAD) – Russell Investments’ latest quarterly survey of fixed income managers found that around 70% expect to inflation for the next 12 months to exceed 2%, from 38% who expressed this view in the Q1 survey. The 72 bond and currency managers who responded to the second quarter 2021 survey also expressed less confidence that the US Federal Reserve (Fed) will meet its target inflation rate. About 50% of those polled expect the Fed to keep its inflation promise, down around 10 percentage points from the previous survey.

“Fixed income managers expect the rise in inflation to continue a little longer as the transition from lockdowns to full economic recovery gathers pace,” said Adam smear, Senior Director, Investment Research – Fixed Income at Russell Investments. “With higher inflation on their radar and the prospect of higher interest rates going forward, we expect managers to dig deeper into asset classes in their quest for yield.”

The survey found that 31% of fixed income managers expect the Fed to start scaling back its asset purchase program as early as Q4 2021, however, consensus sets the timeline in Q1 2022. Respondents also think interest rate will stay lower for longer. About 80% expect the next Fed hike to not happen until 2023, compared to 36% in the Q1 2021 survey. After take-off, 80% of managers expect between two and four rate hikes interest per year.

The survey also revealed less consensus around the movement of American yield curve, 43% of managers expect the yield curve to steepen over the next 12 months (compared to 71% in the survey for the first quarter of 2021). Additionally, 86% expect the 10-year U.S. Treasury yield to trade between 2.0% and 3.0% in the next 12 months, with 45% pinning it between 2.5% and 2.75%.

The second quarter survey also assessed bond managers’ sentiment towards investment grade (IG) credit, leveraged credit, emerging markets, currencies and securitized sectors.

  • Quality credit: Almost 30% of respondents expect a moderate widening of spreads over the next 12 months (compared to just 5% in Q1 2021), compared with 60% predicting limited spreads. Overall, respondents expect spreads to widen by 5 basis points, revealing a change in sentiment from the Q1 2021 survey, when managers expected a squeeze spreads of -6 basis points. Meanwhile, 70% of managers remain confident that IG companies’ leverage will drop while nearly 30% of managers expect leverage to remain at least stable over the year. next. Regarding areas of possible significant pricing errors, managers highlighted the energy and utilities sectors, given the increasing focus of investors on the environment, social and governance (ESG).
  • Leverage credit: 83% of managers expect range-limited spreads over the next 12 months versus 50% in the Q1 survey, while only 9% still expect moderate tightening. In addition, 70% expect a significant improvement in business fundamentals, rising 5% more than in the survey of the first quarter. Respondents consider US leveraged loans to offer the most attractive market opportunities, followed by CLO Mezzanine. For the potential risks of greatest concern to the global high yield market over the next 12 months, the managers selected inflation and rising interest rates. No manager expressed concern about inflation in our Q1-21 survey. In addition, nearly 80% of managers expect defaults to be between 0 and 3% in the next 12 months, compared to 50% in the Q1 survey which saw defects in the order. from 3 to 5%.
  • Emerging Markets (ME): Survey respondents remain very constructive on emerging currencies, with nearly 86% expecting positive performance from developing currencies over the next 12 months. Around 17% of managers expect FX EM to post strong positive returns over the period, compared to 40% in the Q1 survey, while 11% expect FX to be a detractor . When it comes to currency opportunities in emerging markets, managers expect the Brazilian real and Russian ruble to outperform over the next 12 months, while 35% expect the Turkish lira to be the worst performing emerging currency, unlike the previous survey where the Turkish lira was the most overweighted trade. Overall, 63% of managers expect positive currency returns over the next 12 months, including 10% who see rates as offering the most positive return potential.

Regarding the space of emerging debt in hard currencies (HC EMD), managers are less optimistic. Only 33% expect benchmark spreads to narrow over the next 12 months, compared to 74% in the first quarter survey. They expect a weighted average return of 3.9% over the next 12 months. Regarding country preferences, the managers selected Ukraine and Egypt as offering the highest expected return over the next 12 months. China and the Philippines remain the two main underweight countries. In addition, managers have chosen Fed policy followed by changes in the level of US Treasuries as the two main risk factors for the performance of hard currency EMDs over the next 12 months.

  • Securitized sectors: The managers expressed more conservative views on the securitized segment. Only 19% plan to add risk to their securitized return-focused portfolios over the next 12 months, up from 50% in the Q1 survey, while 67% plan to maintain current risk levels. When asked to take a significant beta position, 22% said they already have a long base in their portfolios, compared to 64% in the Q1 survey, while 50% expect to add short positions. The survey also found that 48% of managers expect out-of-branch spreads to tighten moderately over the next 12 months, compared to 57% in the Q1 survey, while 29% expect to that the spreads are limited. Regarding long / short positions on CMBX.6.BBB-, 47% of managers responded that they would take a short position, while 32% responded that they would buy protection. Regarding the CLO market, managers expressed more balanced views, with 57% citing the overall risk aversion sentiment of the market as the main risk, followed by the underlying deterioration in the credit of loan guarantees.

About Russell Investments

Russell Investments is a leading global investment solutions company with $ 326.9 billion in assets under management (as of 3/31/2021) and $ 2.8 trillion in assets under advice (as of 31/31). 12/2020) for customers in 32 countries. a wide range of investment capabilities to institutional investors, financial intermediaries and individual investors around the world. Building on a legacy of 85 years of continuous innovation to deliver exceptional value to clients, Russell Investments works every day to improve people’s financial security. Based in Seattle, Washington, Russell Investments has offices in 19 cities around the world, including New York, London, Tokyo and Shanghai. For more information, please visit www.investissementsrussell.com.


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