Walking, not running, the last mile of inflation

CONTRIBUTORS

Sonal Desai, Ph.D.

Chief Investment Officer,
Portfolio Manager

Nikhil Mohan

Economist
Franklin Templeton Fixed Income

Angelo Formiggini

Economist,
International Research Analyst

Patrick Klein, Ph.D.

Director of Multi-Sector Strategy,
Portfolio Manager
United States

John Beck

Director of Global Fixed Income,
Portfolio Manager
United Kingdom

David Zahn, CFA, FRM

Head of European Fixed Income,
Portfolio Manager
United Kingdom

This publication is a complement to the 2Q24 Franklin Templeton Fixed Income Macro Views.

Executive summary

The US economy shows strength, with a tight job market and solid wage growth, while the European economy remains stagnant. Both the Federal Reserve (Fed) and European Central Bank (ECB) are looking for continued evidence of lower inflation before starting their easing cycle. The Bank of Japan (BoJ) has begun its somewhat delayed process to tighten policy to address increasing inflation and labor costs.

For fixed income spread sectors, we remain cautious of rich valuations, but yields are still attractive to us with risk adjusted carry a focus of our portfolio makeup.

In this issue, we look closely at the following themes and provide our outlooks for fixed income sectors:

Macroeconomic themes

US Fed rate cuts to wait a while longer
Cautious optimism in the euro area
BoJ—a “watchful” adjustment

Portfolio themes

Looking for yield in all the right places
Watch where you step
Reversion back to normal correlations

Special topic—Riding the Waves: Exploring the ripple effect of higher mortgage rates on agency MBS

Agency mortgage-backed securities (MBS) offer what we believe to be attractive income and compelling risk-adjusted returns as prepayment activity is nearly nonexistent given the low incentive for borrowers to refinance at current high mortgage rates.

Read the full paper to learn more.

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