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Opportunity amid volatility

As we enter 2023, our macro outlook for fixed income revolves around three main drivers:
  1. Elevated inflation
  2. Restrictive monetary policy
  3. Rapidly slowing growth

In 2022, historically high inflation led global central banks to make a series of bold tightening moves. In 2023, we believe this may result in a significant slowing of global growth and, in the U.S., a likely recession by the middle of 2023.

Timely measures of rent inflation have likely peaked
Line graph depicting the U.S. Zillow Rent Index, month-over-month, and the U.S. CPI urban consumer owner equivalent rent of residences, from January 2019 to October 2022Date range: January 2019-October 2022. Source: Bloomberg, Principal Fixed Income.

U.S. outlook

It’s our view that inflation may gradually move toward the Federal Reserve’s (Fed) 2% goal over the year. Core goods inflation has made progress during 2022, services have been stickier, and measures of new lease signings suggest that it’s only a matter of time before rent/services inflation makes progress toward the Fed’s goal.
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Major policy rate change 2023 vs. 2022 (bps)
Bar chart of global major policy rate changes comparing 2023 vs. 2022As of December 22, 2022. Source: Bloomberg, Principal Fixed Income.

Global outlook

The global outlook for 2023 is one of cautious optimism. With the Fed unable to readily rescue the economy, global policymakers are factoring in a sharp drop in growth to tone down the pace of policy tightening, despite expectations of moderating inflationary pressures. Risk remains as central bank balance sheets have become bloated following a decade of on-and-off quantitative easing and need some release.
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Investment implications

The combination of elevated inflation, restrictive monetary policy, and slowing global growth will present unique challenges for investors; however, select opportunities in fixed income remain attractive in our view.

Investment grade credit

The combination of higher yields and wider spreads—along with stable credit metrics—heralds a positive backdrop for corporate bonds.

High yield credit

The significant decline in bond prices seen in 2022 paves the way for an attractive entry point into a high-income asset class with additional capital appreciation upside potential.

Securitized debt

Short AAA consumer asset-backed securities and government-guaranteed mortgage-backed securities offer attractive yields and tend to outperform into (and through) recessions.


Taxable U.S. municipal bonds are particularly attractive investments when measured against other investment grade, fixed income asset classes.

Emerging market debt

The global and U.S. cycles continue to be the major drivers for emerging-market (EM) bonds. While the sell-off in 2022 was led by rates moving higher, this period going into a late-cycle U.S. recession is likely to determine the path of credit spreads in 2023.

Private credit

The current market presents attractive opportunities for investors as market volatility and economic uncertainty contribute to tighter credit conditions, which in turn contribute to a favorable lending environment.

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Fixed income outlook, 1Q 2023

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Risk considerations
Investing involves risk, including possible loss of principal. Past Performance does not guarantee future return. All financial investments involve an element of risk. Therefore, the value of the investment and the income from it will vary and the initial investment amount cannot be guaranteed. Fixed‐-income investment options are subject to interest rate risk, and their value will decline as interest rates rise. Potential investors should be aware that Investment grade corporate bonds carry credit risks, default risk, liquidity risks, currency risks, operational risks, legal risks, counterparty risk and valuation risks. Lower-rated securities are subject to additional credit and default risks. Fixed-income investment options that invest in mortgage securities, such as commercial mortgage-backed securities, are subject to increased risk due to real estate exposure. Emerging market debt may be subject to heightened default and liquidity risk. International investing involves greater risks such as currency fluctuations, political/social instability, and differing accounting standards. Private credit involves an investment in non-publicly traded securities which are subject to illiquidity risk. Portfolios that invest in private credit may be leveraged and may engage in speculative investment practices that increase the risk of investment loss. Investments in Private Credit may also be subject to real estate-related risks, which include new regulatory or legislative developments, the attractiveness and location of properties, the financial condition of tenants, potential liability under environmental and other laws, as well as natural disasters and other factors beyond a manager’s control.

Important information
This material covers general information only and does not take account of any investor’s investment objectives or financial situation and should not be construed as specific investment advice, a recommendation, or be relied on in any way as a guarantee, promise, forecast or prediction of future events regarding an investment or the markets in general. Information presented has been derived from sources believed to be accurate; however, we do not independently verify or guarantee its accuracy or validity. Any reference to a specific investment or security does not constitute a recommendation to buy, sell, or hold such investment or security, nor an indication that the investment manager or its affiliates has recommended a specific security for any client account. Subject to any contrary provisions of applicable law, the investment manager and its affiliates, and their officers, directors, employees, agents, disclaim any express or implied warranty of reliability or accuracy and any responsibility arising in any way (including by reason of negligence) for errors or omissions in the information or data provided.

This material may contain 'forward-looking' information that is not purely historical in nature and may include, among other things, projections, and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader.

All figures shown in this document are in U.S. dollars unless otherwise noted. All assets under management figures shown in this document are gross figures, before fees, transaction costs and other expenses and may include leverage, unless otherwise noted. Assets under management may include model-only assets managed by the firm, where the firm has no control as to whether investment recommendations are accepted, or the firm does not have trading authority over the assets.

Index performance information reflects no deduction for fees, expenses, or taxes. Indices are unmanaged and individuals cannot invest directly in an index.

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