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Fixed-Income Insights

How might economic and monetary policy developments affect bond markets in the coming year? 

Transcript

2018: The View for U.S. Fixed Income

With
Tim Paulson, Investment Strategist

The Market Environment

Tim Paulson:

Well, 2017 was a strong year for risk assets. Characterized by low volatility-- and accelerating global growth prospects. As one would expect in such an environment, higher beta risk assets such as equities, high yield, and emerging markets were the primary beneficiaries. Heading into 2018 we expect to see more of the same, albeit with lower overall return goals. But really fueled by a combination of central banks around the world-- a synchronized global growth story that continues to accelerate, and a strong technical backdrop of a significant amount of liquidity in investor hands that will continue to stabilize markets.

The Central Bank Effect

Tim Paulson:

While much has been made of the Fed hiking and potentially tightening monetary policy, the fact is that monetary policy-- financial conditions have rarely been this easy in the United States. And when you look around at the rest of the world, global central banks-- remain very accommodative. Why do accommodative central banks matter so much for markets? Well, first, it helps keep financial conditions easy around the world.

Second, it creates a market environment in which investors are continually incentivized to move into riskier investments in order to achieve higher returns. Nowhere is this more evident than in Europe and Japan, where sitting in cash costs money, and sovereign debt has negative yields. This dynamic tends to lower return expectations across all asset classes, while pushing up the prices of risk assets in general. And it tends to stabilize markets and dampen volatility.

The Global Growth Story

Tim Paulson:

Well, accommodative central banks only get you so far if you don't have solid underlying fundamentals. But we've reached a point now where many countries have emerged from recession, and virtually the entire world is now participating in a global growth story. We're in a far better place than we were a year ago. And you can see that in the form of stronger earnings, higher equity markets, and tighter credit spreads.

Risk and Opportunity in 2018

Tim Paulson:

Our base case for 2018 is for continued growth. Of course there are always risks. Geo-political risks are ever-present. We could see waves of populism change the political landscape in Europe. You could see data turn sour and-- increased threat of recession. The question, of course, is: Are you getting fairly compensated for those risks? Generally speaking, when we consider interest rate risks our takeaway is no. But when we think about credit risk, for the most part our answer is yes. Whether we're talking higher grade corporate credit, commercial mortgages, even high yield, we believe we're being fairly compensated for those risks. Remember that markets are just as aware of the bad news as they are of the good news. It's all pretty evenly priced in.

Final Thoughts

Tim Paulson:

Generally speaking, higher beta asset classes should be the strongest performers in 2018 if growth continues as expected. The real question when you get these periodic market downturns, which will always happen, is whether the fundamental outlook for global growth has changed, or whether our view of central bank accommodation has changed. As long as those remain intact, those are going to continue to be buying opportunities.

For additional perspectives from Lord Abbett investment professionals, visit lordabbett.com.

Equities, high yield, and emerging markets performance referenced in opening segment as represented by the S&P 500® Index, BofA Merrill Lynch U.S. High Yield Constrained Index, and MSCI Emerging Markets Index, respectively. Indexes are unmanaged, do not reflect the deduction of fees or expenses, and are not available for direct investment.

IMPORTANT INFORMATION

The information contained herein is current as of the date of issuance (or such earlier date as referenced herein) and is subject to change without notice. Lord Abbett has no obligation to update any or all of such information. All amounts, market value information, and estimates included herein have been obtained from outside sources where indicated or represent the good faith judgment of Lord Abbett. Where such information has been obtained from outside sources, Lord Abbett cannot guarantee the accuracy or completeness of such information.

References to specific securities and issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities. The securities referenced may or may not be held in portfolios managed by Lord Abbett and, if such securities are held, no representation is being made that such securities will continue to be held.

Risks to Consider: The value of investments in fixed-income securities will change as interest rates fluctuate and in response to market movements. Generally, when interest rates rise, the prices of debt securities fall, and when interest rates fall, prices generally rise. Bonds may also be subject to other types of risk, such as call, credit, liquidity, interest-rate, and general market risks. High-yield securities, sometimes called junk bonds, carry increased risks of price volatility, illiquidity, and the possibility of default in the timely payment of interest and principal. Moreover, the specific collateral used to secure a loan may decline in value or become illiquid, which would adversely affect the loan's value. Longer-term debt securities are usually more sensitive to interest-rate changes; the longer the maturity of a security, the greater the effect a change in interest rates is likely to have on its price. Lower-rated bonds may be subject to greater risk than higher-rated bonds. Foreign investments generally pose greater risks than domestic investments, including greater price fluctuations and higher transaction costs. Special risks are inherent in international investing, including those related to currency fluctuations and foreign, political, and economic events. Further, investing in the securities of issuers located in certain emerging countries may present a greater risk of loss resulting from problems in security registration and custody or substantial economic or political disruptions. No investing strategy can overcome all market volatility or guarantee future results.

Historical performance indications and financial market scenarios are not reliable indicators of current or future performance. Past performance is not a reliable indicator or a guarantee of future results.

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This broadcast may contain assumptions that are “forward-looking statements,” which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize or that actual returns or results will not be materially different from those described here.

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The views and opinions expressed by the Lord Abbett speaker are those of the speaker as of the date of the broadcast, and do not necessarily represent the views of the firm as a whole. Any such views are subject to change at any time based upon market or other conditions and Lord Abbett disclaims any responsibility to update such views. Neither Lord Abbett nor the Lord Abbett speaker can be responsible for any direct or incidental loss incurred by applying any of the information offered.

The value of investments and any income from them is not guaranteed and may fall as well as rise, and an investor may not get back the amount originally invested. Please consult your investment professional for additional information concerning your specific situation.

The information provided is not directed at any investor or category of investors and is provided solely as general information about Lord Abbett's products and services and to otherwise provide general investment education. None of the information provided should be regarded as a suggestion to engage in or refrain from any investment-related course of action as neither Lord Abbett nor its affiliates are undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity. If you are an individual retirement investor, contact your financial advisor or other fiduciary about whether any given investment idea, strategy, product or service may be appropriate for your circumstances.

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