CONTRIBUTORS
Sonal Desai, Ph.D.
Chief Investment Officer, Franklin Templeton Fixed Income
Nikhil Mohan
Economist, Research Analyst
Franklin Templeton Fixed Income
Angelo Formiggini
Economist,
International Research Analyst
Patrick Klein, Ph.D.
Director of Multi-Sector Strategy,
Portfolio Manager
United States
John Beck
Director of Global Fixed Income,
Portfolio Manager
United Kingdom
David Zahn, CFA, FRM
Head of European Fixed Income,
Portfolio Manager
United Kingdom
Executive summary
Our growth projections for the United States continue to improve as a “soft landing” becomes the most likely outcome, while other economies may face harsher conditions. US and European central banks appear to have reached the peaks of their hiking cycles, but we believe it is still too soon to declare victory against inflation. A core tenet of our macro view is central banks will need to maintain rates at higher levels than the market anticipates, which will keep pressure on yields across the curves.
We are still cautious about taking broad-based risks as spreads are currently not pricing in any potential downside; however, all-in yields remain at historically high levels, making them appear attractive to us. We are finding pockets of value across several sectors and are focusing on security selection.
In this issue we cover:
Macroeconomic themes
- Fed narrative changes, but inflation battle not won
- Still healthy private sector surplus
- Uncertainty around the US economy continues
Portfolio themes
- Yield investors provide a technical tailwind to credit
- Market discounting downside risk
- Follow the Fed speak
US economic review
- Underlying macro fundamentals still point to structurally higher US Treasury Yields
Euro area economy
- Navigating the pause
Special topic: Commercial real estate realities—Pandemic reckoning and WeWork’s uncharted journey
There has been a lot of attention given to the ever-worsening office sector of commercial real estate (CRE) with headlines capturing defaults. WeWork, who was supposed to challenge the dynamic of shared office use, filed for bankruptcy on November 7. With co-working being one of the largest categories of office space, the decline of WeWork mirrors what is happening in office CRE and the challenges the Commercial mortgage-backed securities (CMBS) sector faces.
Read the full paper to learn more.
WHAT ARE THE RISKS?
All investments involve risks, including 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.
Asset-backed, mortgage-backed or mortgage-related securities are subject to prepayment and extension risks.
International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.
Investments in technology-related industries carry much greater risks of adverse developments and price movements in such industries than investing in a wider variety of industries.
Changes in the credit rating of a bond, or in the credit rating or financial strength of a bond’s issuer, insurer or guarantor, may affect the bond’s value. Low-rated, high-yield bonds are subject to greater price volatility, illiquidity and possibility of default. Floating-rate loans and debt securities are typically rated below investment grade and are subject to greater risk of default, which could result in loss of principal. Any companies and/or case studies referenced herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton.
The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio.