Global fixed income markets show resilience amid inflation: Report

A Morgan Stanley report highlights the resilience of global fixed income markets in June, which weathered expectations of prolonged high interest rates due to strong investor demand, stable credit markets, and healthy corporate fundamentals.

Global fixed income markets remained resilient in June despite expectations that interest rates could stay higher for longer, supported by strong investor demand, lower market volatility and healthy corporate fundamentals, according to a Morgan Stanley report.

The report said stronger economic data, persistent inflation and cautious messaging from central banks during June reinforced expectations that policy rates would remain restrictive for an extended period.

Despite the challenging backdrop, fixed income markets absorbed record levels of bond issuance as investor demand remained robust.

"Overall, June reinforced the resilience of fixed income markets despite persistent inflation, higher-for-longer policy expectations, and ongoing geopolitical uncertainty," the report said.

Yield Movements Across Markets

According to the report, the yield on the 10-year US Treasury rose to 4.47 per cent at the end of June, while shorter-term yields increased more sharply as markets priced in a prolonged restrictive monetary policy.

In contrast, bond yields declined across Europe and several other developed markets amid relatively weaker economic growth.

Credit Markets and AI Financing

The report noted that global credit markets remained stable despite historically tight valuations.

US investment-grade credit spreads widened marginally by 2 basis points to 74 basis points, while European investment-grade spreads widened by 1 basis point to 80 basis points, reflecting steady investor risk appetite despite elevated bond issuance.

Morgan Stanley highlighted continued growth in artificial intelligence (AI)-related financing during the month, particularly among large technology firms, adding that AI infrastructure investment is expected to remain a key driver of corporate bond issuance.

Leveraged Loans and Securitised Credit

The report also said leveraged loans continued to demonstrate resilient fundamentals, supported by healthy corporate earnings and sustained demand from collateralised loan obligation (CLO) investors.

Securitised credit markets also remained well supported, with residential mortgage-backed securities emerging among the best-performing structured credit segments despite elevated issuance.

Future Outlook and Key Risks

Looking ahead, Morgan Stanley identified inflation as the key macroeconomic risk and said historically tight valuations make active security selection increasingly important.

The report added that emerging market sovereign and corporate debt continues to offer attractive investment opportunities due to elevated real yields, resilient market conditions and improving fundamentals in select economies.

It also maintained an overweight stance on securitised products, citing strong demand for high-quality assets and supportive market technicals.

(ANI)

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