Capital IdeasTM
Investment insights from Capital Group
Fixed Income
Andrew A. Cormack
Keiyo Hanamura
The market narrative about how the current economic cycle might end has turned full circle: from certain recession to soft landing – and now back to recession.
In early 2022, as one of the fastest hiking cycles began, the market was convinced a recession was inevitable; it was just a question of its severity. By 2023, the market was bracing for the lagged impact of the rate hikes. As time went on, however, the economy remained resilient, even managing to come through a mini banking crisis relatively unscathed. With the labour market remaining strong and the consumer still spending, the narrative shifted toward an expectation the US Federal Reserve would be able to achieve a soft landing. This remained the consensus view through the first half of 2024, but weaker than expected employment data in August moved expectations back toward recession.
Although our base case remains for a soft landing, it is important to keep an open mind given the extraordinary events of the past few years. Different outcomes favour different areas of the bond market: a hard landing is likely to favour longer duration/higher quality assets, whereas shorter duration credit-oriented strategies should benefit from a soft landing. However, if inflation were to significantly reaccelerate, cash would be king.
In this paper, we develop a framework to help investors navigate this uncertainty and think about the potential near and longer-term macroeconomic scenarios. We find a two-layered approach, combining flexibility with the diversification benefits of a core bond portfolio, could help investors meet any challenges that may lie ahead.
A framework to navigate the landing
For illustrative purposes only.
Source: Capital Group. LC: Local currency. HC: Hard currency
Our latest insights
RELATED INSIGHTS
Hear from our investment team.
Sign up now to get industry-leading insights and timely articles delivered to your inbox.
Past results are not predictive of results in future periods. It is not possible to invest directly in an index, which is unmanaged. The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment. This information is not intended to provide investment, tax or other advice, or to be a solicitation to buy or sell any securities.
Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. All information is as at the date indicated unless otherwise stated. Some information may have been obtained from third parties, and as such the reliability of that information is not guaranteed.
Capital Group manages equity assets through three investment groups. These groups make investment and proxy voting decisions independently. Fixed income investment professionals provide fixed income research and investment management across the Capital organization; however, for securities with equity characteristics, they act solely on behalf of one of the three equity investment groups.