In the second half of the year, we look for the yield curve to flatten further as the Fed hikes rates, and for volatility to remain high. However, we believe the bulk of the increase in yields is likely behind us for this cycle and now favor adding duration exposure,1 while continuing to focus on higher-credit-quality bonds. For these services, Wise Capital is paid a fee based upon the assets that Eaton Vance provides investment advice to following these introductions. Morgan Stanley helps people, institutions and governments raise, manage and distribute the capital they need to achieve their goals. How to prepare for either scenario. Past performance is no guarantee of future results. Preferred securities generally have lower credit ratings and a lower claim to assets than the issuer's individual bonds. That's a sea change from the past few years when real yields were negative. 2 One basis point is equal to 1/100th of 1%, or 0.01%, or 0.0001. Usage will be monitored. In the early months of the year, there was a "reset" in interest rates. The global presence that Morgan Stanley maintains is key to our clients' success, giving us keen insight across regions and markets, and allowing us to make a difference around the world. As the abundant liquidity of the past few years is reduced by central bank tightening, the riskier segments of the market are likely to respond first. Housing in both the U.S. and Europe remain well supported by price appreciation of the underlying assets and the credit quality of borrowers. Aside from the pandemic-induced plunge in March 2020, the Bloomberg U.S. Financial Conditions Index reading is now the tightest since 2018near the end of the last Fed tightening cycle. These conclusions are speculative in nature, may not come to pass and are not intended to predict the future performance of any specific strategy or product the Firm offers. In a declining interest-rate environment, the portfolio may generate less income. Thus, the dividend amount payable is also impacted by variations in the inflation rate, as it is based upon the principal value of the bond. A career at Morgan Stanley means belonging to an ideas-driven culture that embraces new perspectives to solve complex problems. After that, it's likely that the pace of rate hikes will slow, as tightening financial conditions should lead to slower economy and lower inflation. 2021 Charles Schwab & Co., Inc. On the positive side, our forecast for rising interest rates and increased volatility proved to be accurate. Lower-rated securities are subject to greater credit risk, default risk, and liquidity risk. U.S. Breakeven 10 Year (USGGBE10 Index). In most cycles, yields tend to converge near the peak of the federal funds rate for the cycle. This material has been prepared on the basis of publicly available information, internally developed data and other third-party sources believed to be reliable. However, MBS have unique characteristics that investors should understand before considering them as an investment. The slope of the yield curve gives an idea of future interest rate changes and economic activity. As the Fed moves ahead with its "front-loaded" tightening, fears of recession are growing. cable/media/broadcasting, though expect volatility in the near term and seek opportunities to buy at attractive valuations, retail, because of strong consumer fundamentals, and. We are wary, however, of commercial real estate, but this varies greatly by sector. Where such a translation is made this English version remains definitive. Since our founding in 1935, Morgan Stanley has consistently delivered first-class business in a first-class way. This material may not be linked to unless such hyperlink is for personal and non-commercial use. The Firm has not authorised financial intermediaries to use and to distribute this material, unless such use and distribution is made in accordance with applicable law and regulation. Expect another strong year for deal-making, say Morgan Stanleys M&A bankers, as all the elements that drove 2021s record activity remain in place. Accordingly, save where an exemption is available under the relevant law, this material shall not be issued, circulated, distributed, directed at, or made available to, the public in Hong Kong. Daily data as of 5/31/2022. Past performance is no guarantee of future results. All investment profits and losses belong to the clients; principal is not guaranteed. Certain U.S. government securities purchased by the Strategy, such as those issued by Fannie Mae and Freddie Mac, are not backed by the full faith and credit of the U.S. 2022Charles Schwab & Co., Inc.All rights reserved. Repayment at maturity is guaranteed by the U.S. government and may be adjusted for inflation to become the greater of the original face amount at issuance or that face amount plus an adjustment for inflation. We expect that trend to continue into the second half of the year. Spain: MSIM FMIL (Madrid Branch), Calle Serrano 55, 28006, Madrid, Spain. Default risks may remain low and we believe single-Bs provide a good tradeoff between risk and return. Aggregate = Bloomberg U.S. Yields shown are the average yield-to-worst except for the Dividend Aristocrats, which is the average dividend yield. Stay abreast of the latest trends and developments. Please consider the investment objectives, risks, charges and expenses of the funds carefully before investing. To obtain a prospectus for the Morgan Stanley funds please download one at morganstanley.com/im or call 1-800-548-7786. Nasdaq and its CEO Adena Friedman are on a mission to not only transform what an exchange can do, but how data and information can remake global commerce. Member SIPC. As a global financial services firm, Morgan Stanley is committed to technological innovation. The Charles Schwab Corporation provides a full range of brokerage, banking and financial advisory services through its operating subsidiaries. Capital appreciation from bond funds and discounted bonds may be subject to state or local taxes. For illustrative purposes only. Consequently, rate hikes often surprised investors, consumers, and businessesincreasing volatility. Sovereign debt securities are subject to default risk. 410 (Director of Kanto Local Finance Bureau (Financial Instruments Firms)), Membership: the Japan Securities Dealers Association, The Investment Trusts Association, Japan, the Japan Investment Advisers Association and the Type II Financial Instruments Firms Association. Longer-term securities may be more sensitive to interest rate changes. By rating cohort, we see value in single-B-rated bonds, viewed as a sweet spot in the high-yield universe because they have more spread or yield and less interest-rate sensitivity than BBs, with a higher credit quality than CCCs. Any product based on an index is in no way sponsored, endorsed, sold or promoted by the applicable licensor and it shall not have any liability with respect thereto. It is difficult to predict the timing, duration, and potential adverse effects (e.g. However, we still expect volatility to remain high as central banks shift away from easy-money policies. However, as real yields rise, the hurdle rate needed to achieve attractive returns rises. All expressions of opinion are subject to change without notice in reaction to shifting market conditions. It is not possible to invest directly in an index. We believe our greatest asset is our people. You might remember this fellow featured in our 2022 outlook last Decemberthe investor who was caught by surprise when the easy money flowing through markets started to decline. Source: Bloomberg, data as of 12/31/2021 and 5/31/2022. But the war in Ukraine sent energy prices spiking, and supply chain problems were more prolonged than expected, causing inflation to spike sharply higher. High-yield securities (junk bonds) are lower-rated securities that may have a higher degree of credit and liquidity risk. But, if inflation persists and becomes a bigger roadblock, the Fed may tighten financial conditions, contracting future growth and increasing default risk. Demographic trends are far different with the U.S. population aging. Whether its hardware, software or age-old businesses, everything today is ripe for disruption. There is even room for a decline if inflation pressures ease. Our theme coming into 2022 was "when the tide rolls out." The information herein has not been based on a consideration of any individual investor circumstances and is not investment advice, nor should it be construed in any way as tax, accounting, legal or regulatory advice. That resulted in a sharp decline in the prices of intermediate- and long-term bonds that are most sensitive to interest rate changes. For reference, the low occurred on 3/24/2020 and was -6.33. Download the Schwab app from iTunesClose. Portfolios are subject to market risk, which is the possibility that the market values of securities owned by the Portfolio will decline and may therefore be less than what you paid for them. Aggregate Bond Index; Municipal Bonds = Bloomberg U.S. Municipal Bond Index; Treasuries = Bloomberg U.S. Treasury Index; and Dividend Aristocrats = S&P 500 Dividend Aristocrats Index (Dividend Aristocrats). Indirect charges also may be incurred, such as brokerage commissions for incorporated securities. All clients should read the Documents Provided Prior to the Conclusion of a Contract carefully before executing an agreement. The whole or any part of this material may not be directly or indirectly reproduced, copied, modified, used to create a derivative work, performed, displayed, published, posted, licensed, framed, distributed or transmitted or any of its contents disclosed to third parties without the Firms express written consent. Morgan Stanley Investment Management is the asset management division of Morgan Stanley. Market participants use this value as what they believe the expected inflation should be in the next 10 years, on average. Overall, we look for returns in the second half of the year to be better for fixed income investors now that the market has reset interest rates higher. After years of low yields that drove investors to allocate more to risky investments, income investors can find attractive yields in higher credit quality fixed income. Ten-year Treasury yields will likely trade in a 2.5% to 3.0% range but end the year closer to the low end of that range. All rights reserved. Eaton Vance Management International (Asia) Pte. If inflation stabilizes as we expect in 2022, then both local emerging-market debt and currencies stand to appreciate as global investors become attracted to the yield, carry and potential returns from this asset class. We thought it would likely be a more gradual process. We live that commitment through long-lasting partnerships, community-based delivery and engaging our best assetMorgan Stanley employees. NOT FDIC INSURED | OFFER NO BANK GUARANTEE | MAY LOSE VALUE | NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY | NOT A DEPOSIT. Source: Bloomberg Index Services Limited. From volatility and geopolitics to economic trends and investment outlooks, stay informed on the key developments shaping today's markets. Our firm's commitment to sustainability informs our operations, governance, risk management, diversity efforts, philanthropy and research. Mortgage-backed securities (MBS) yields may have room to rise as the Federal Reserve continues its "quantitative tightening" process. The 10-year breakeven rate is calculated as the difference between the 10-year Treasury rate and the 10-year Treasury Inflation-Protected Security (TIPS) rate. International investments involve additional risks, which include differences in financial accounting standards, currency fluctuations, geopolitical risk, foreign taxes and regulations, and the potential for illiquid markets. Meanwhile, we do see potential opportunities for fixed income investors to benefit from the rise in rates. The message from the Fed is loud and clear. Eaton Vance Management, Eaton Vance Management (International) Limited and Parametric Portfolio Associates LLC holds an exemption under Paragraph 9, 3rd Schedule to the SFA in Singapore to conduct fund management activities under an arrangement with EVMIA and subject to certain conditions. Information regarding expected market returns and market outlooks is based on the research, analysis and opinions of the authors or the investment team. Each MSIM affiliate is regulated as appropriate in the jurisdiction it operates. In addition, the Fed will be reducing the amount of bonds it holds. Past performance is no guarantee of future results. For some strategies, a contingency fee may be incurred in addition to the fee mentioned above. Our culture of access and inclusion has built our legacy and shapes our future, helping to strengthen our business and bring value to clients. Another key difference in policy this time around is the use of "forward guidance" by the Fed. This is not for the purpose of a recommendation or solicitation of transactions or offers any particular financial instruments. Financial companies also have the potential to adjust to higher inflation risks relative to other sectors in the market. The views and opinions and/or analysis expressed are those of the author or the investment team as of the date of preparation of this material and are subject to change at any time without notice due to market or economic conditions and may not necessarily come to pass. Underpinning all that we do are five core values. Importantly, inflation expectations have been declining from peak levels seen earlier in the year as the markets digest the implications of tighter Fed policy. Markets demand higher risk premia when the economic outlook changes, and there are low-risk alternatives to obtaining yields. As an investment advisory fee for an IAA or an IMA, the amount of assets subject to the contract multiplied by a certain rate (the upper limit is 2.20% per annum (including tax)) shall be incurred in proportion to the contract period. Yes, You Can Be a Tech Innovator at Morgan Stanley, Chief Strategist and Portfolio Manager, Global Fixed Income Team, Morgan Stanley Investment Management. Derivative instruments may disproportionately increase losses and have a significant impact on performance. Market values can change daily due to economic and other events (e.g. The views expressed do not reflect the opinions of all investment personnel at Morgan Stanley Investment Management (MSIM) and its subsidiaries and affiliates (collectively the Firm), and may not be reflected in all the strategies and products that the Firm offers. Past performance is no guarantee of future results. From our origins as a small Wall Street partnership to becoming a global firm of more than 60,000 employees today, Morgan Stanley has been committed to clients and communities for 85 years. Thus a 50-basis-point change is equal to 0.5% or one half percentage point. 314182, which accept responsibility for its contents. Dubai: MSIM Ltd (Representative Office, Unit Precinct 3-7th Floor-Unit 701 and 702, Level 7, Gate Precinct Building 3, Dubai International Financial Centre, Dubai, 506501, United Arab Emirates. In the 1980s the Fed provided very little information about its plans to the markets. However, we still look for volatility to remain high as central banks shift away from their easy-money policies. In addition, real Treasury yields (that is, adjusted for inflation) minus yields on Treasury Inflation Protected Securities (TIPS) generally have moved out of negative territory and are now at the highest levels since 2019 (aside from a liquidity driven surge at the onset of the pandemic.) Reserve Balance Wednesday Close for Treasury Bills, Treasury Notes, Treasury Bonds, Treasury Inflation Protected Securities (TIPS), and Mortgage-Backed Securities. Illustration by Charlos Gary. Effective Federal Funds Rate, (FEDFUNDS) and 10-Year Treasury Constant Maturity Rate, Percent, Monthly, Not Seasonally Adjusted (DGS10). Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance. At Morgan Stanley, we lead with exceptional ideas. Future results may differ significantly depending on factors such as changes in securities or financial markets or general economic conditions. This material is not a product of Morgan Stanleys Research Department and should not be regarded as a research material or a recommendation. EVMI utilises a third-party organisation in the Middle East, Wise Capital (Middle East) Limited (Wise Capital), to promote the investment capabilities of Eaton Vance to institutional investors. We are more cautious on credit risk,however. Reducing the size of the balance sheet combined with a synchronized global tightening cycle can mean a substantial decline in excess liquidity circulating in the global economy. Daily data as of 5/31/2022. Current market pricing indicates a short, but sharp, tightening cycle from the Fed, and the flattening of the yield curve from the fourth quarter of last year indicates growth will likely moderate in the future. However, term is a linear measure of the years until repayment ofprincipalis due; it does not change with the interest rate environment. The Netherlands: MSIM FMIL (Amsterdam Branch), Rembrandt Tower, 11th Floor Amstelplein 1 1096HA, Netherlands. Despite their best efforts, muni investors often unknowingly make mistakes with their portfolios which can lead to poor financial outcomes. Please read the prospectus carefully before investing. EVMI is exempt from the requirement to hold an Australian financial services license under the Corporations Act in respect of the provision of financial services to wholesale clients as defined in the Corporations Act 2001 (Cth) and as per the ASIC Corporations (Repeal and Transitional) Instrument 2016/396. None of the other Eaton Vance group entities or affiliates holds any licences, approvals or authorisations in Singapore to conduct any regulated or licensable activities and nothing in this material shall constitute or be construed as these entities or affiliates holding themselves out to be licensed, approved, authorised or regulated in Singapore, or offering or marketing their services or products. Currently, the economy is already starting to show signs of slowing down as interest-rate-sensitive industries like housing experience declining sales, manufacturing orders slow, and corporate profit growth flattensall indicators that point to rising recession risk. When money is cheap, borrowing and investing in even the riskiest markets can look attractive compared to negative returns in cash. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner or investment manager. Credit spreads (the yield difference between Treasuries and corporate bonds) have widened, stocks prices have declined, the dollar has moved sharply higher, and real interest rates have moved up into positive territory. Investment value will fluctuate, and preferred securities, when sold before maturity, may be worth more or less than original cost. Futures accounts are not protected by SIPC. They also may be subject to counterparty, liquidity, valuation, correlation and market risks. At Morgan Stanley, youll find trusted colleagues, committed mentors and a culture that values diverse perspectives, individual intellect and cross-collaboration. Note: The Bloomberg U.S. Financial Conditions Index tracks the overall level of financial stress in the U.S. money, bond, and equity markets to help assess the availability and cost of credit. Among non-financials, we like BBB-rated corporate bonds; we are cautious on those with ratings of A or above, which tend to have longer-duration maturities and are more interest-rate sensitive. The futures markets were pointing to a rise in the fed funds rate to as high as 3% to 3.5% until just recently. Any index referred to herein is the intellectual property (including registered trademarks) of the applicable licensor. Our view was that the result would be rising interest rates and higher volatility, especially in the riskier segments of the markets. The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. Y-axis is truncated at -2.0 for scaling purposes. Calvert Research and Management is exempt from the requirement to hold an Australian financial services licence in accordance with class order 03/1100 in respect of the provision of financial services to wholesale clients in Australia. Supporting documentation for any claims or statistical information is available upon request. Central banks responded by ratcheting up their rate hiking plans. Morgan Stanley is differentiated by the caliber of our diverse team. Our preferred strategy is to gradually increase duration of bonds in portfolios at these higher yields. BLOOMBERG is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively "Bloomberg"). Fixed income securities are subject to the ability of an issuer to make timely principal and interest payments (credit risk), changes in interest rates (interest-rate risk), the creditworthiness of the issuer and general market liquidity (market risk). Registered No. We offer timely, integrated analysis of companies, sectors, markets and economies, helping clients with their most critical decisions. We estimate that the target range for the federal funds rate will end the year at 2.25% to 2.5%. Morgan Stanley Distribution, Inc. serves as the distributor for Morgan Stanley Funds. There has been a parallel shift up in yields in the Treasury market, for bonds with maturities of two years or greater, as markets adjusted to the swift move toward tightening by the Fed. Brokerage Products: Not FDIC Insured No Bank Guarantee May Lose Value, Charles Schwab Investment Management (CSIM), Benefits and Considerations of Mutual Funds, Environmental, Social and Governance (ESG) Mutual Funds, Environmental, Social and Governance (ESG) ETFs, ADRs, Foreign Ordinaries & Canadian Stocks, Bond Funds, Bond ETFs, and Preferred Securities, Environmental, Social and Governance (ESG) Investing. Central banks in emerging markets have been well ahead of developed markets in raising rates to stem inflation risks. Meet the experts behind Schwab's investing insights. Past performance is no guarantee of future results. If there are any discrepancies between the English version and any version of this material in another language, the English version shall prevail. Australia: This publication is disseminated in Australia by Morgan Stanley Investment Management (Australia) Pty Limited ACN: 122040037, AFSL No. Everything we do at Morgan Stanley is guided by our five core values: Do the right thing, put clients first, lead with exceptional ideas, commit to diversity and inclusion, and give back. Access to Electronic Services may be limited or unavailable during periods of peak demand, market volatility, systems upgrade, maintenance, or for other reasons.
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