"Building a Better Base Case for Fixed Income in 2013"
Report by Richard Oswald of JPMorgan Funds
"We begin the year with greater conviction in our macro base case, a muddle-through recovery. While prospects for breakout GDP growth have not appreciably improved, the threat of a global economic crisis has receded, thanks to coordinated central bank liquidity support and a rebound in the emerging markets.
We believe fixed income allocations can generate stable returns in the environment we anticipate, although the sources of those returns could well differ from more conventional scenarios:
Two facts will weigh on government and aggregate bond returns, in our view. Policy rates are near their lower bound, and developed market central bankers are determined to keep them there until the recovery seems more durable.
- Although high yield prices have run up, reducing yields themselves below long-term norms, defaults have fallen to near-record lows, so that the risk/reward calculus remains favorable.
- Locally denominated emerging market credit seems poised to gain from currency appreciation as emerging market growth outpaces halting recovery in the mature markets.
- The improving housing market in the U.S. should continue to bolster the non-agency mortgage-backed market, though buyers should take care in identifying seasoned and sound securities."