Menu Our services in the selected location:
  • No services available for your region.
Select Location:
Remember my selection
Your browser is out of date.

Fixed Income Outlook 3Q 2022

Navigating Expeditious Tightening

Heading into the third quarter, inflation will likely remain at the root of market volatility. With central banks getting tough on inflation, prospects of a soft landing are reduced and the risk of a hard landing or stagflation scenario is heightened. There are two key areas to focus on to gauge progress on inflation being brought back under control.

First, signs of softening in the labor market, either through a decline in job openings or a moderate decline in employment. Second, a decline in consumer and business inflation expectations, for which commodity inflation is particularly salient. In navigating an expeditious monetary tightening cycle, we hold moderate exposure to macro markets and remain overweight spread sectors that provide attractive carry and roll¹. Overall, high uncertainty underscores the importance of being both humble and nimble with our investment views.

Highlights of the report are below and we encourage you to download the full report for more detailed insights.

 

The economic and market forecasts presented herein are for informational purposes as of the date of this document. There can be no assurance that the forecasts will be achieved.  Please see additional disclosures at the end.

CIO Perspectives

Samuel Finkelstein

Chief Investment Officer, Fixed Income and Liquidity Solutions

Samuel Finkelstein


“Central bank emphasis on data dependence, rather than forward guidance, creates a source of potential market volatility given data is highly unpredictable in this era of supply shocks. But with volatility comes opportunity. We see value in corporate credit and we continue to find relative value opportunities across and within fixed income sectors.”

Whitney Watson

Global Head of Fixed Income Portfolio Management, Construction & Risk

Whitney Watson


“The recovery coincides with structural shifts such as decarbonization, globalization centred on digital services and destabilization in geopolitics. Some shifts will be reflationary, while others will have a disinflationary effect. Overall, a new economic order has potential to contribute to higher risk premiums in rates and risk assets going forward.”

Macro at a Glance

Growth

Economic activity is expanding but decelerating, particularly in the industrial sector. The service sector recovery is ongoing but may slow given downbeat sentiment (see Chart). We believe the expeditious tightening cycle also adds to downside growth risks through tighter financial conditions. Soft landings are more common when long-run inflation expectations are well anchored and the private sector balance sheet is strong but less common when inflation is high¹. Today’s cycle reflects all three elements, underscoring uncertainty on the economic outlook.

Downbeat Sentiment May Weigh on Spending and Investment

US employment cost index, year-over-year

 

Source: Macrobond, Goldman Sachs Asset Management. US sentiment as of June 2022, OECD country sentiment as of May 2022. The economic and market forecasts presented herein are for informational purposes as of the date of this document. There can be no assurance that the forecasts will be achieved.  Please see additional disclosures at the end.

Inflation

Inflation is proving persistent. In the hoped-for soft landing scenario, goods inflation slows on normalizing demand and improved supply (see Chart), a cool down in commodity prices is reflected in lower inflation expectations, and economic growth—which is underpinned by a strong labor market—slows to the extent needed to ease wage growth as companies shelve new hiring plans rather than engaging in layoffs. Prolonged commodity inflation, which is particularly salient for short term inflation expectations, presents upside risks. Longer-term, decarbonization, deglobalization in the flow of goods and labor, aging demographics, digitization and destabilization in geopolitics present mixed inflation implications. But with current data still distorted by supply shocks, we believe it is too soon to conclude whether we are in a new higher inflation and rate regime.

Rising Inventories Should Support Goods Supply and Ease Goods Prices

US employment cost index, year-over-year

 

Source: Macrobond, Goldman Sachs Asset Management. As of May 2022. The economic and market forecasts presented herein are for informational purposes as of the date of this document. There can be no assurance that the forecasts will be achieved.  Please see additional disclosures at the end.

Policy Picture

Expeditious Tightening

The Fed and other central banks were able to keep policy accommodative in the pre-pandemic cycle due to inflation running below the target rate of 2%. Their task now is far more complex as some of the forces lifting inflation—supply disruptions and soaring energy and other commodity prices—are beyond policymakers’ control.

 

The ECB is on track to exit the negative interest rate policy that was put in place in 2014 by the end of the third quarter. But fragmentation of the currency union remains a chronic issue. A new ECB tool to address future stresses in sovereign bond markets may calm these concerns, though the triggers and features of such a backstop remain unspecified.

Ain't No Rate High Enough - From 25bps to 50bps to 75bps...

Central bank asset purchases

 

Source: Macrobond, Goldman Asset Management. As of June 23, 2022. See Appendix for central bank abbreviations. The economic and market forecasts presented herein are for informational purposes as of the date of this document. There can be no assurance that the forecasts will be achieved.  Please see additional disclosures at the end.

What to Watch

Supply and Balance Sheets

An improvement on the supply side of the economy has potential to alleviate inflation pressures and reduce the degree of monetary tightening required to slow demand by restoring balance in labor markets, housing markets, supply chains and the energy sector.

 

Household savings rates are declining in part due to high inflation, but the stock of excess savings remains high. We believe US and European corporate balance sheets can withstand macro headwinds. This assessment informs our benign rating downgrade and default outlooks. 

Savings Rates are Falling but the Stock of Savings Remains High

Growth Impact of Changes in Financial conditions on annual growth

 

Source: Macrobond, Goldman Sachs Asset Management. US as of Q1 2022, UK and Euro area as of Q4 2021. The economic and market forecasts presented herein are for informational purposes as of the date of this document. There can be no assurance that the forecasts will be achieved. Please see additional disclosures at the end.

Related Insights

¹ Carry reflects an asset-expected total return (net of financing costs) beyond price appreciation. It is estimated by the yield differential (or ‘spread’) between a fixed income sector and a risk-free asset (typically a relevant sovereign bond yield). Roll refers to a change in spread from “rolling down” a credit curve over time. Our strategic asset allocation models expected returns on carry and roll adjusted for expected downgrade and default activity and seeks to construct fixed income portfolios that optimize carry and roll over a market cycle.

Abbreviations: Reserve Bank of Australia (RBA), Reserve Bank of New Zealand (RBNZ), Bank of Canada (BoC), Swiss National Bank  (SNB), US Federal Reserve (Fed), European Central Bank (ECB), Bank of England (BoE) and Bank of Japan (BoJ).

General Disclosures

Please refer to the disclosures in the downloadable publication

This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities.

Past performance does not guarantee future results, which may vary. The value of investments and the income derived from investments will fluctuate and can go down as well as up. A loss of principal may occur.

Views and opinions expressed are for informational purposes only and do not constitute a recommendation by Goldman Sachs Asset Management to buy, sell, or hold any security. Views and opinions are current as of the date of this presentation and may be subject to change, they should not be construed as investment advice.

Investment grade refers to the quality of a company's credit and to be considered investment grade issue, a company must be rated at 'BBB' or higher. Anything below this 'BBB' rating is considered non-investment grade or high yield.

This material is provided at your request for informational purposes only. It is not an offer or solicitation to buy or sell any securities.

THIS MATERIAL DOES NOT CONSTITUTE AN OFFER OR SOLICITATION IN ANY JURISDICTION WHERE OR TO ANY PERSON TO WHOM IT WOULD BE UNAUTHORIZED OR UNLAWFUL TO DO SO.
Prospective investors should inform themselves as to any applicable legal requirements and taxation and exchange control regulations in the countries of their citizenship, residence or domicile which might be relevant.

Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness. We have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public sources.

References to indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only and do not imply that the portfolio will achieve similar results. The index composition may not reflect the manner in which a portfolio is constructed. While an adviser seeks to design a portfolio which reflects appropriate risk and return features, portfolio characteristics may deviate from those of the benchmark.

Economic and market forecasts presented herein reflect a series of assumptions and judgments as of the date of this presentation and are subject to change without notice. These forecasts do not take into account the specific investment objectives, restrictions, tax and financial situation or other needs of any specific client. Actual data will vary and may not be reflected here. These forecasts are subject to high levels of uncertainty that may affect actual performance. Accordingly, these forecasts should be viewed as merely representative of a broad range of possible outcomes. These forecasts are estimated, based on assumptions, and are subject to significant revision and may change materially as economic and market conditions change. Goldman Sachs has no obligation to provide updates or changes to these forecasts. Case studies and examples are for illustrative purposes only.

This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. This material has been prepared by Goldman Sachs Asset Management and is not financial research nor a product of Goldman Sachs Global Investment Research (GIR). It was not prepared in compliance with applicable provisions of law designed to promote the independence of financial analysis and is not subject to a prohibition on trading following the distribution of financial research. The views and opinions expressed may differ from those of Goldman Sachs Global Investment Research or other departments or divisions of Goldman Sachs and its affiliates. Investors are urged to consult with their financial advisors before buying or selling any securities. This information may not be current and Goldman Sachs Asset Management has no obligation to provide any updates or changes.

References to indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only and do not imply that the portfolio will achieve similar results. The index composition may not reflect the manner in which a portfolio is constructed. While an adviser seeks to design a portfolio which reflects appropriate risk and return features, portfolio characteristics may deviate from those of the benchmark.

Index Benchmarks

Indices are unmanaged. The figures for the index reflect the reinvestment of all income or dividends, as applicable, but do not reflect the deduction of any fees or expenses which would reduce returns. Investors cannot invest directly in indices.

The indices referenced herein have been selected because they are well known, easily recognized by investors, and reflect those indices that the Investment Manager believes, in part based on industry practice, provide a suitable benchmark against which to evaluate the investment or broader market described herein. The exclusion of “failed” or closed hedge funds may mean that each index overstates the performance of hedge funds generally.

United Kingdom: In the United Kingdom, this material is a financial promotion and has been approved by Goldman Sachs Asset Management International, which is authorized and regulated in the United Kingdom by the Financial Conduct Authority.

European Economic Area (EEA): This material is a financial promotion disseminated by Goldman Sachs Bank Europe SE, including through its authorised branches ("GSBE"). GSBE is a credit institution incorporated in Germany and, within the Single Supervisory Mechanism established between those Member States of the European Union whose official currency is the Euro, subject to direct prudential supervision by the European Central Bank and in other respects supervised by German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufischt, BaFin) and Deutsche Bundesbank.

Switzerland: For Qualified Investor use only – Not for distribution to general public. This is marketing material. This document is provided to you by Goldman Sachs Bank AG, Zürich. Any future contractual relationships will be entered into with affiliates of Goldman Sachs Bank AG, which are domiciled outside of Switzerland. We would like to remind you that foreign (Non-Swiss) legal and regulatory systems may not provide the same level of protection in relation to client confidentiality and data protection as offered to you by Swiss law.

Asia excluding Japan: Please note that neither Goldman Sachs Asset Management (Hong Kong) Limited (“GSAMHK”) or Goldman Sachs Asset Management (Singapore) Pte. Ltd. (Company Number: 201329851H ) (“GSAMS”) nor any other entities involved in the Goldman Sachs Asset Management business that provide this material and information maintain any licenses, authorizations or registrations in Asia (other than Japan), except that it conducts businesses (subject to applicable local regulations) in and from the following jurisdictions: Hong Kong, Singapore, Malaysia, India and China. This material has been issued for use in or from Hong Kong by Goldman Sachs Asset Management (Hong Kong) Limited, in or from Singapore by Goldman Sachs Asset Management (Singapore) Pte. Ltd. (Company Number: 201329851H) and in or from Malaysia by Goldman Sachs (Malaysia) Sdn Berhad (880767W).

Australia: This material is distributed by Goldman Sachs Asset Management Australia Pty Ltd ABN 41 006 099 681, AFSL 228948 (‘GSAMA’) and is intended for viewing only by wholesale clients for the purposes of section 761G of the Corporations Act 2001 (Cth). This document may not be distributed to retail clients in Australia (as that term is defined in the Corporations Act 2001 (Cth)) or to the general public. This document may not be reproduced or distributed to any person without the prior consent of GSAMA. To the extent that this document contains any statement which may be considered to be financial product advice in Australia under the Corporations Act 2001 (Cth), that advice is intended to be given to the intended recipient of this document only, being a wholesale client for the purposes of the Corporations Act 2001 (Cth). Any advice provided in this document is provided by either Goldman Sachs Asset Management International (GSAMI), Goldman Sachs International (GSI), Goldman Sachs Asset Management, LP (GSAMLP) or Goldman Sachs & Co. LLC (GSCo). Both GSCo and GSAMLP are regulated by the US Securities and Exchange Commission under US laws, which differ from Australian laws. Both GSI and GSAMI are regulated by the Financial Conduct Authority and GSI is authorized by the Prudential Regulation Authority under UK laws, which differ from Australian laws. GSI, GSAMI, GSCo, and GSAMLP are all exempt from the requirement to hold an Australian financial services licence under the Corporations Act of Australia and therefore do not hold any Australian Financial Services Licences. Any financial services given to any person by GSI, GSAMI, GSCo or GSAMLP by distributing this document in Australia are provided to such persons pursuant to ASIC Class Orders 03/1099 and 03/1100. No offer to acquire any interest in a fund or a financial product is being made to you in this document. If the interests or financial products do become available in the future, the offer may be arranged by GSAMA in accordance with section 911A(2)(b) of the Corporations Act. GSAMA holds Australian Financial Services Licence No. 228948. Any offer will only be made in circumstances where disclosure is not required under Part 6D.2 of the Corporations Act or a product disclosure statement is not required to be given under Part 7.9 of the Corporations Act (as relevant).

Canada: This presentation has been communicated in Canada by GSAM LP, which is registered as a portfolio manager under securities legislation in all provinces of Canada and as a commodity trading manager under the commodity futures legislation of Ontario and as a derivatives adviser under the derivatives legislation of Quebec. GSAM LP is not registered to provide investment advisory or portfolio management services in respect of exchange-traded futures or options contracts in Manitoba and is not offering to provide such investment advisory or portfolio management services in Manitoba by delivery of this material.

Japan: This material has been issued or approved in Japan for the use of professional investors defined in Article 2 paragraph (31) of the Financial Instruments and Exchange Law by Goldman Sachs Asset Management Co., Ltd.

Confidentiality

No part of this material may, without Goldman Sachs Asset Management’s prior written consent, be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorized agent of the recipient.

Date of first use: July 6, 2022 

283646-OTU-1633243

Please enter your email address to continue reading.

Confirm Your Access


An email has been sent to you to verify ownership of your email address.

Please verify the link in the email by clicking the confirmation button. Once completed, you will gain instant access to our insights.

If you did not receive the email from us please check your spam folder or try again.