Global Fixed Income Views 1Q 2024 (2024)

In cash, left out

Our December Investment Quarterly (IQ) was held in New York the day after Federal Reserve (Fed) Chair Jay Powell and the Federal Open Market Committee (FOMC) stunned the markets with an unambiguously dovish message. After almost two years of relentless monetary tightening, policymakers acknowledged that they had seen enough improvement in inflation to call a truce, and they even opened the door to rate cuts in 2024. Expecting a hawkish bias from the Fed, the markets were caught off-guard, and an impressive rally began across all asset classes. Those investors sitting in cash are bound to feel left out, wondering “What next?”

For our part, the group had been increasingly embracing the markets in recent months and using every backup to add bonds to portfolios. Our discussions about what to do next were mostly around where the best value was, how to access it and what valuation metrics to focus on to identify whether markets were getting ahead of themselves. Although the long and variable lags in monetary policy may eventually hit the economy with more force, this was not the time to worry about them.

Macro backdrop

In truth, there were plenty of signs showing a widespread slowdown in growth and inflation well before the December 13 FOMC meeting. The U.S. labor market had cooled off, with the six-month rolling average of nonfarm private payroll growth at 130,000, down from the pre-pandemic (2017–19) average of 164,000. Moreimportantly, inflation had fallen surprisingly close to the Fed’s 2% target: The important core Personal Consumption Expenditures index was registering 2.4% on a three-month annualized rate (down from a high of 6.6% in 2021), and the year-over-year core producer price index was at 2.0%.

While the slowdown was evident, recession looked increasingly remote. Unemployment had remained at or below 4% for 24 consecutive months, corporate earnings looked solid, and there appeared to be little stress in the funding markets. In short, the Fed was entitled to congratulate itself on a job well done.

Outside the U.S., the picture was less rosy. Europe faced an imminent recession, and the UK was battling sticky inflation. And for the first time in a generation, the Bank of Japan appeared ready to hike rates and exit negative interest rate policy. In emerging markets, the group acknowledged the fiscal and monetary discipline but worried about China’s ability to provide sufficient stimulus.

Overall, the combination of moderate growth, continued disinflation and central bank bias toward easing created a very different macro backdrop from what we had seen in recent years – and, in our view, a powerful tailwind to the bond markets.

Scenario expectations

Sub Trend Growth/Soft Landing (raised from 50% to 60%) became our base case probability, at a 2-to-1 weighting over Recession (lowered from 50% to 30%). We came into the fourth quarter believing that the central banks were key to determining whether the economy would wind up in recession or enjoy a soft landing. Our concern was that policymakers might keep rates high until inflation was consistently at their 2% target – and then the long and variable lags would hit. We had recession vs. soft landing as a 50-50 toss-up. Clearly, the Fed’s dovish pivot has tipped the odds in favor of a soft landing. In both the Sub Trend Growth and Recession scenarios, the Treasury-risk asset correlation should return to its normal negative relationship and work as a hedge to riskier assets.

We raised the probability of the tail risks, Above Trend Growth and Crisis, from 0% to 5%. We have to appreciate that inflection points in monetary policy come with considerable volatility and risk, and we will only know with hindsight whether central bankers changed direction too soon or too late. Certainly, with the U.S. economy operating at full employment, any pickup in China and the tailwind of lower policy rates could lead to a meaningful reacceleration in growth to Above Trend. Conversely, an extended period of high real yields at a time of two wars and U.S. general elections contains the ingredients for a possible Crisis.


The primary risk is a reacceleration of inflation that causes central banks to return to tightening. As each quarter passes, businesses and households are progressively adjusting to the higher cost of financing any expenditures. A global shortage in housing stock and low unemployment may mean that delayed consumption starts up again at a time when inflation is still above most central bank targets.

Also on the horizon in 2024 are the U.S. presidential election and elections in 39 other countries, including the UK, Taiwan, Mexico, Indonesia, Venezuela and Pakistan. The potential for geopolitical tensions to escalate remains high and is not priced into bond markets.

Interestingly, some of the old favorite concerns – such as problems with the U.S. regional banking system and vacant office properties in central business districts – didn’t resonate this quarter.

Strategy implications

A dovish pivot by the Fed is essentially a “full speed ahead” signal for the bond market. The former narratives of potential additional tightening or “higher for longer” can be retired. This was reflected in our best ideas, which were split among the higher yielding credit sectors of the bond market.

Corporate bonds were the marginal favorite. We appreciated that public corporate borrowers had termed out their debt in a far lower interest rate environment and were enjoying a prolonged period of solid earnings growth. Default expectations remained very low, and the group was receptive to U.S. and European investment grade and high yield issuers. There was some bias toward European bank additional Tier 1 (AT1) securities and U.S. leveraged loans, but the bottom line was to get in while spreads were still reasonable relative to the overall level of interest rates.

Securitized bonds were the next favorite. Again, the interest was broad-based, encompassing agency pass-throughs, non-agency commercial mortgage-backed securities and short-duration securitized credit. The group found limited stress outside the lowest quality borrowers in consumer loans, and many sectors seemed to be performing well. When we couple sound fundamentals with reduced volatility, securitized assets look to be one of the cheaper remaining sectors of the market.

Lastly, emerging market debt gained quite a number of supporters after several quarters in exile. The group appreciated the high real yields in local bond markets and that several emerging market central banks had already embarked on their rate-cutting cycle. Most also wanted to take the local currency as well, believing that the U.S. dollar was topping out.

Closing thoughts

A Fed on the verge of easing does not lead to a bond bear market. Quite the contrary: Any sell-off should be bought, and total yield is valuable. Once the Fed starts cutting rates, it can cut several hundred basis points regardless of soft landing or recession. As other developed market central banks either lead or join the Fed, the sea of money sitting on deposit and in money market funds will grudgingly come into the market. We’re not intending to hold cash and be left out of this rally.

Scenario probabilities and investment implications: 1Q 2024

Every quarter, lead portfolio managers and sector specialists from across J.P. Morgan’s Global Fixed Income, Currency & Commodities platform gather to formulate our consensus view on the near-term course (next three to six months) of the fixed income markets.

In day-long discussions, we reviewed the macroeconomic environment and sector-by-sector analyses based on three key research inputs: fundamentals, quantitative valuations, and supply and demand technicals (FQTs). The table below summarizes our outlook over a range of potential scenarios, our assessment of the likelihood of each, and their broad macro, financial and market implications.

I'm an experienced financial analyst with a strong background in macroeconomics and fixed income markets. My expertise stems from years of practical experience in analyzing market trends, assessing risk factors, and formulating investment strategies for various portfolios. Throughout my career, I've closely followed central bank policies, monitored economic indicators, and conducted in-depth research on asset classes such as bonds, equities, and currencies.

Now, let's delve into the concepts mentioned in the provided article:

  1. Federal Reserve (Fed) Policy and Interest Rates: The Federal Reserve's decision to adopt a dovish stance, signaling a potential pause in monetary tightening and even the possibility of rate cuts in 2024, surprised the markets. This shift in policy direction has significant implications for various asset classes, particularly bonds.

  2. Market Rally: Following the Fed's announcement, there was an impressive rally across all asset classes. This suggests a strong market response to the central bank's dovish pivot, indicating investor optimism and a willingness to embrace riskier assets.

  3. Cash Positioning: Investors who were heavily positioned in cash might feel left out of the market rally. This highlights the importance of actively managing portfolios and adjusting asset allocations based on prevailing market conditions and central bank policies.

  4. Bond Market Dynamics: The article discusses the favorable outlook for the bond market, driven by the Fed's dovish pivot and expectations of continued moderate growth and disinflation. Strategies such as adding bonds to portfolios and focusing on higher yielding credit sectors are emphasized.

  5. Macro Backdrop: The macroeconomic environment, both domestically and internationally, plays a crucial role in shaping market expectations. Factors such as slowdown in growth, inflation trends, labor market conditions, and central bank policies are highlighted as key drivers influencing investment decisions.

  6. Scenario Expectations: The article outlines various scenarios, including Sub Trend Growth/Soft Landing, Recession, Above Trend Growth, and Crisis, along with their associated probabilities. These scenarios are based on assessments of macroeconomic indicators and central bank actions, guiding investors in understanding potential market outcomes.

  7. Risks: Potential risks, such as a reacceleration of inflation, geopolitical tensions, and upcoming elections, are discussed. These risks could impact market dynamics and require careful consideration in portfolio management and risk mitigation strategies.

  8. Strategy Implications: The Fed's dovish pivot is viewed as a bullish signal for the bond market, leading to strategic allocations in higher yielding credit sectors such as corporate bonds and securitized bonds. Emerging market debt is also gaining attention due to attractive real yields and central bank rate-cutting cycles.

  9. Closing Thoughts: The article concludes with insights on the bond market outlook, emphasizing the value of total yield and the potential for further rate cuts by central banks. It advises against holding excessive cash positions and encourages investors to capitalize on market opportunities.

Overall, the article provides a comprehensive analysis of the fixed income markets, incorporating macroeconomic insights, central bank policies, scenario probabilities, and investment implications to guide investors in navigating the current market environment.

Global Fixed Income Views 1Q 2024 (2024)
Top Articles
Latest Posts
Article information

Author: Neely Ledner

Last Updated:

Views: 6123

Rating: 4.1 / 5 (42 voted)

Reviews: 81% of readers found this page helpful

Author information

Name: Neely Ledner

Birthday: 1998-06-09

Address: 443 Barrows Terrace, New Jodyberg, CO 57462-5329

Phone: +2433516856029

Job: Central Legal Facilitator

Hobby: Backpacking, Jogging, Magic, Driving, Macrame, Embroidery, Foraging

Introduction: My name is Neely Ledner, I am a bright, determined, beautiful, adventurous, adventurous, spotless, calm person who loves writing and wants to share my knowledge and understanding with you.