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Slow down, everyone. You’re moving too fast.”
- Jack Johnson

The market consensus expectation is for the US Federal Reserve (Fed) to lower rates once or twice in 2024, with those cuts not expected until the latter half of the year due to the economy’s resilience and inflation still exceeding central bank targets. Our view is that rates will eventually move lower as inflation declines gradually and signs of weakness in sectors like small business, housing, services and trade hint at softening consumer spending. Our base case remains one of slowing growth, declining inflation and supportive Fed policy to avoid a recession. Given this backdrop, we favor mortgage-backed securities (MBS) and local currency emerging markets (EM), which could contribute meaningfully to performance over the rest of the year.

Key takeaways

  • The economy’s growth last year was supported by fiscal stimulus and strong consumer activity, but fiscal policy is not expected to contribute to growth this year.
  • International trade and global growth rates have weakened, with no immediate signs of a turnaround, indicating potential headwinds for the economy.
  • Despite geopolitical risks, the recalibration of central bank policies and sturdy global growth provide a positive fundamental backdrop for fixed-income investments.
  • MBS faces headwinds from the Fed’s quantitative tightening and policy tightening, yet reduced rate volatility and low prepayment risk should support positive MBS performance.
  • EM currencies are at low levels due to a strong US dollar, but they stand to benefit from a shift in US interest-rate policy, especially as EM countries have already raised rates and improved financial policies.
     

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Definitions:

Agency mortgage-backed securities (MBS) are asset-backed securities secured by a mortgage or collection of mortgages issued by federal agencies like Fannie Mae, Freddie Mac and Ginnie Mae.

 

WHAT ARE THE RISKS?

Past performance is no guarantee of future results.  Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls. International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Asset-backed, mortgage-backed or mortgage-related securities are subject to prepayment and extension risks.

U.S. Treasuries are direct debt obligations issued and backed by the “full faith and credit” of the U.S. government. The U.S. government guarantees the principal and interest payments on U.S. Treasuries when the securities are held to maturity. Unlike U.S. Treasuries, debt securities issued by the federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the U.S. government. Even when the U.S. government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the market value of these securities.

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