Schroders: The risk of a hard landing for the economy has significantly decreased, and the outlook on bonds has turned positive

According to the Zhitong Finance APP, the Schroders Investment Global Unconstrained Fixed Income Investment Team indicates that the policies of various central banks and governments are gradually alleviating concerns about a global economic recession, while the risk of an economic "soft landing" has become more balanced. Schroders maintains a moderately positive view on the duration of global bonds. Despite the macro environment becoming relatively unfavorable, the investment market has digested the Federal Reserve's milder interest rate hike expectations, leading to a significant improvement in valuations over the past month.

Regionally, Schroders is relatively cautious about the U.S. bond market and prefers Europe, Australia, and Canada, as the macro environment in these markets is more favorable for bond duration performance. At the same time, a slight underweight position is maintained on European peripheral countries, mainly because there is almost no further room for narrowing spreads in these regions.

Over the past month, central banks and governments have successively released a series of data and policy statements, which collectively indicate that the possibility of a global "hard landing" has significantly diminished. Although the details of stimulus measures have not yet been fully implemented, it is believed that the intention to stabilize the economy is clear, which not only greatly reduces the risk of a global "hard landing" but also provides some space for a "no landing" scenario, provided that commodity prices can receive strong support.

As the Federal Reserve gradually relaxes its fiscal policy while maintaining robust economic growth, there is ample reason to raise expectations for a "soft landing" and "no landing," with "soft landing" remaining the most confident baseline scenario. The U.S. employment data from early October showed strong job growth, exceeding market expectations, and the positive data revisions over the past month further indicate that the resilience of the labor market may be more robust than previously anticipated. Therefore, the pressure of an economic recession has further weakened. Considering the above, the proactive policies of the Federal Reserve and the relatively stable labor market support a reasonable reduction in expectations for a potential "hard landing."

In addition, attention should be paid to the latest U.S. inflation data, which shows that the process of inflation retreat has stalled in the short term. Core prices rose 0.3% month-on-month, enough to push the three-month annualized inflation from 2.1% to 3.1%. Looking ahead, Schroders still believes that the trend of declining inflation will continue, but this data serves as a reminder to the market that the process of inflation retreat will not be smooth and will still face fluctuations and challenges.

If China implements more economic stimulus measures according to the latest announcements, it is believed that the global economy will benefit, especially as the world's second-largest economy begins to stabilize. These positive spillover effects will undoubtedly support partners within the Asia-Pacific region, but the currently struggling Eurozone economy is particularly expected to gain a boost from China's recovery momentum.

Schroders' view on the UK bond market has also turned positive, as the valuations (i.e., price adjustments) over the past few weeks have significantly improved. From an asset allocation perspective, the most favored market in September—mortgage-backed securities—remains in the lead. Compared to other credit markets, the pricing in this sector has become more attractive over the past month, and duration volatility is expected to be relatively controlled, further supporting the performance of mortgage-backed securities. Similarly, there is optimism about quasi-sovereign bonds, which have received a slight upgrade in the scoring table based on valuation considerations In terms of corporate credit, there is still a preference for European investment-grade corporate bonds over U.S. investment-grade corporate bonds, and the outlook on the European economy has improved over the past month. The valuation of U.S. investment-grade bonds is close to the lowest levels in the past decade, almost fully reflecting expectations of an economic "soft landing." In the high-yield bond market, there is also a preference for the European market; compared to the U.S., the valuation attractiveness of the U.S. high-yield bond market is limited, and like investment-grade bonds, the valuation has fully reflected expectations of an economic "soft landing," which exposes the spread to multiple risks