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CONTRIBUTORS

Christy Tan

Investment Strategist
Franklin Templeton Institute

Lukasz Labedzki, CFA

Senior Analyst
Franklin Templeton Institute

Preview:

This publication contains our latest views based on data analysis using the Franklin Templeton Institute’s US Fixed Income Navigator (FIN), with a special emphasis on rising opportunities from a series of market inefficiencies. A reassessment on European fixed income is also warranted. We’ve included our thoughts following the early August market dislocations.

Third quarter (Q3) 2024 highlights

In Q3 2024, Franklin Templeton Institute’s model-based US Fixed Income Navigator (FIN) conviction has improved, moving to positive territory where the balance of risks and opportunities is constructive for bonds. However, it’s important to note that a solid move in line with model guidance had already materialized by early August.

Exhibit 1: Fixed Income Navigator Dashboard (LYVFE signals) June 2024 update

Source: Franklin Templeton Institute.

Undeniably, real yields in the fixed income space remain attractive, near multi-year highs. Simultaneously, the macroeconomic backdrop has weakened, which suggests Federal Reserve (Fed) easing is closer. When the Fed initiates the rate-cutting cycle, the market can dynamically react, leading to a bull steepening of the yield curve, which is likely to be favorable for high-quality bonds.

From the risk perspective, growing fiscal deficits might make investors require greater premium for owning US government bonds. A resilient US economy might keep the Fed’s easing cycle on a gradual and shallow path. Additionally, geopolitical tensions might make inflation hard to control.

In this piece, we explore recent developments relevant to fixed income investors, with a focus on how certain market inefficiencies that we have been observing have recently begun to normalize.

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.

International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility.

 

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