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Unconstrained fixed income views: November 2023

In the first of a new monthly series, the Global Unconstrained Fixed Income team assesses the current macroeconomic environment and what it means for portfolio positioning.

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Global Unconstrained Fixed Income

As the Northern Hemisphere winter draws upon us, a cooling chill has started to be felt across the global economy. The Global Unconstrained Fixed Income team assesses the current macroeconomic environment and where it might be heading, by analysing various states of the world. 

As illustrated in the chart below, we continue to assign a high probability to a soft landing. While this base case is unchanged since last month, the probability we assign to a hard landing has risen while the probability of a no-landing has fallen in comparison. Why is that?

Chart: Still expecting a soft landing - but risks of a hard landing steadily rising

GUFI newsletter chart

Source: Global Unconstrained Fixed Income team as at 14 November 2023. For illustrative purposes only. “Soft landing” refers to a scenario where economic growth slows, but to a sustainable rate without experiencing recession; “hard landing” refers to a sharp fall in economic activity; “no landing” refers to a scenario in which inflation remains sticky and there’s a reacceleration of interest rate hikes.

A darkening of the US outlook to match the shorter winter days?

The US consumer has been a strong support for the broader economy. GDP data for Q3 showed consumption spending rising by an incredibly strong 4% annualised rate from the previous quarter. However, the consumer is facing headwinds on two key fronts.

Firstly, there is a fading level of fiscal support as Covid measures have rescinded (the end of the pause to student loan repayments, for example). There’s evidence of a significant drawdown in the level of savings in recent months. Most alarmingly we have seen a very sharp rise in the number of seriously delinquent credit card debtors, the largest quarterly jump in 25 years.

Secondly, there’s a distinctive softening tone in labour market data, with slowing job growth and leading employment indicators in manufacturing and services falling sharply in the most recent releases. So far, this is consistent with a gradual easing of labour market conditions, but we are watching this trend closely.

The big chill?

Outside of the US, we remain concerned about the growth outlook in the eurozone. Although we detect tentative signs of stabilisation in the manufacturing sector (albeit at weak levels), the services sector looks to have decided that gravity is not worth defying and is catching down towards manufacturing.  

This growth weakness reflects very efficient passthrough of monetary policy tightening to the eurozone economy, and the European Central Bank seems to be slowly recognising that it may have delivered enough.

Meanwhile, in Asia, there are some signs of stabilisation in countries such as China and South Korea, but weak purchasing managers’ indices (PMIs) in the former are a reminder that any recovery is fragile and tentative.

What does this mean for portfolio positioning?

Yield curve steepeners (that’s being positioned for shorter maturities to outperform long-dated bonds) remain a high conviction expression of our fundamental outlook, given their ability to work in several different environments. On duration (or interest rate risk) our moderately positive view is focused on Europe where the growth trajectory remains relatively bleak, but we have also upgraded our US score from negative to neutral.

We continue to favour sectors such as covered bonds, securitised credit and quasi-sovereign (although we’re less positive on the latter due to valuations), which offer comparatively higher yields to government bonds with similar rating profiles. In credit, we prefer European investment grade (IG) credit over US IG and remain cautious on high yield given our concerns on the economic outlook.

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Global Unconstrained Fixed Income


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