What are the key drivers of the global fixed-income markets?
Western Asset, part of Franklin Templeton, has released its Q1 Global Outlook for Fixed Income markets.
In this paper, Western Asset provides a summary of the key drivers behind global outlook and describe where there is value across global fixed-income markets.
Western Asset expects global growth to decelerate from the robust 2021 levels as we move into 2022.
Contributing factors include a sharp pullback in global fiscal stimulus, a reduction in monetary accommodation by key central banks such as the Federal Reserve (Fed), European Central Bank (ECB) and Bank of England (BoE), and the persistence of secular-related headwinds that include rising global debt burdens, aging demographics and technology displacement. Inflation overshoots have proven more persistent than anticipated and remain challenging for policymakers globally.
Western Asset notes: “However, we expect that the impact of leading inflationary components will ease meaningfully through the course of 2022.
“The COVID-19 pandemic continues to bedevil global populations, but we remain optimistic that the worst is behind us as vaccination rates improve around the world. While the new omicron variant risks delaying the reopening of global economies, we do not believe it will derail it and therefore remain optimistic about spread-product performance going forward.
“The Reserve Bank of Australia (RBA) is likely to drop its QE program in 1Q22, but still remains very dovish on the outlook for the policy rate, focused solely on getting inflation back to target levels of 2% to 3%.
“In the US, the recovery from the shutdown-induced recession/repression is largely complete. Growth will be mostly trend-like, 1.5%-2.5%, with some potential for above-trend growth in leisure-oriented sectors.
“We maintain the view that global inflation will return toward pre-COVID-19 rates sometime soon, as pipeline pressures begin to ease.
“After a very strong rebound in 2021 returning GDP to its pre-crisis level, we expect economic growth in Europe to moderate gradually over the course of 2022.
“We expect China growth for 2022 will come in between 4.5% and 5.5%, with policymakers focused on high-quality growth and assuming no reversal in China’s intended policy messaging on housing, education and internet sectors.”