Fixed income at turning point in 2024: Principal AM

Yasmine Raso

Senior Journalist

15 January 2024

Principal Asset Management’s first-quarter outlook for fixed income is expecting central banks to confront the impact of their tightening cycles amid recessionary pressures over the first quarter of 2024.

The firm’s fixed income perspectives report said inflation is expected to continue its cooldown over the first quarter after starting its decline in 2023.

However, it also joined other market commentators in signalling a potential recession depending on the stability of the labour market and the possibility of rising unemployment. This also comes as the “resilient” consumer is expected to “contend with stubbornly high inflation, higher borrowing rates and tighter lending standards”.

Although headwinds to the economy are expected, several supportive trends for middle market direct lending have an opportunity to enhance risk-adjusted returns relative to historic loan vintages,” Mr Michael Goosay, CIO and Global Head of Fixed Income at Principal Asset Management, said in the report.

“Based on early indications, U.S. private market issuance will start strong in 1Q relative to prior years.

“With the journey to higher rates now in the rearview mirror, investment grade (IG) credit offers compelling yield on an absolute and risk-adjusted basis, as the technical underpinnings of the market remain strong. We now see a favourable entry point for IG credit investors.”

The report also highlighted the asset manager’s optimism surrounding the emerging market sector, despite investors remaining wary over the impact of ongoing geopolitical tension, a disappointing recovery in China and renewed socialist movement in Latin America.

“Despite less robust corporate earnings forecasted in 2024 and the prospect of a more challenging fundamental environment, the strength of balance sheets and above-average yields continue to make high-yield look compelling,” the report said.