Against a higher-for-longer interest rate landscape and limited potential for spread compression, fixed income returns will mainly derive from carry.
Given persistent inflation and a robust macroeconomic environment, we are adjusting our outlook. We now anticipate that the rate-cutting cycle will commence towards the end of the year in the US, and we are shifting our expectations on fixed income returns primarily towards carry.
Accordingly, we are repositioning portfolios, having increased high yield AT1s of strong European banks and emerging market debt to complement the already large position in investment grade. Last, we are keeping a relatively short duration. The result is portfolios with an average investment-grade rating, short duration and attractive carry.
