Skip to content

CONTRIBUTORS

Christy Tan

Investment Strategist
Franklin Templeton Institute

Preview:

Introduction

The Franklin Templeton Institute’s US Fixed Income Navigator (FIN) model has shown significant improvement in Q1 2024, marking a shift to a brighter bond market environment. The primary driver of this shift in perspective is the attractive level of yields across fixed income sectors, a supportive liquidity landscape and, notably, the decrease in inflation and inflation expectations. This decline in inflation is a key factor that increases the likelihood of interest rate cuts and reinstates diversification benefits from bonds.

Despite these positive developments, it is crucial to remain mindful of looming risks. Elevated volatility persists, and the current aggressive market pricing for rate cuts may add fuel to the fire. Additionally, the heightened supply of coupon bonds resulting from substantial US budget deficits poses a risk that is expected to persist for some time. Let’s dig deeper.
 

Q1 2024 Highlights

  • In Q1 2024, the model-based conviction has improved, bringing us into positive territory, signaling a more optimistic outlook for bonds.
  • Opportunities—Yields in fixed income sectors are in a favorable zone. The increased likelihood of interest rate cuts should support high-quality bond returns, especially if accompanied by a bull-steepening trend. Falling inflation may restore diversification benefits from bonds.
  • Risks—Volatility may arise from aggressive and premature market pricing for rate cuts. Higher supply of coupon bonds is another risk, but this can be mitigated by a tapering and eventual ending of quantitative tightening.

WHAT ARE THE RISKS?

All investments involve risks, including possible loss of principal.

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. Low-rated, high-yield bonds are subject to greater price volatility, illiquidity and possibility of default.

 

IMPORTANT LEGAL INFORMATION

This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice.

The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. All investments involve risks, including possible loss of principal.

Data from third party sources may have been used in the preparation of this material and Franklin Templeton ("FT") has not independently verified, validated or audited such data. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments opinions and analyses in the material is at the sole discretion of the user.

Products, services and information may not be available in all jurisdictions and are offered outside the U.S. by other FT affiliates and/or their distributors as local laws and regulation permits. Please consult your own financial professional or Franklin Templeton institutional contact for further information on availability of products and services in your jurisdiction.

Issued by Franklin Templeton Investment Management Limited (FTIML). Registered office: Cannon Place, 78 Cannon Street, London EC4N 6HL. FTIML is authorised and regulated by the Financial Conduct Authority.

Investments entail risks, the value of investments can go down as well as up and investors should be aware they might not get back the full value invested.

CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.