Insights
A Solution in a Rising Rate and Inflationary Environment
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Insight Article
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November 16, 2021
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November 16, 2021
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A Solution in a Rising Rate and Inflationary Environment |
The strong post-2020 economic recovery has led to a new era ruled by rising yields and higher inflation. Going forward, we believe it will be critical to invest in areas of fixed income that may be less impacted by rising rates. In our view, the Morgan Stanley Global Fixed Income Opportunities Fund is well-positioned for this environment.
Subject to change daily. Fund information is provided for informational purposes only and should not be deemed as a recommendation to buy or sell any security or securities in the sectors and countries that may be presented. Performance data quoted represents past performance, which is no guarantee of future results, and current performance may be lower or higher than the figures shown. See page 4 for the Portfolio’s standardized performance.
Source: MSIM, Bloomberg. As of September 30, 2021.
Source: Bloomberg, September 30, 2016 to September 30, 2021.
Performance data quoted represents past performance, which is no guarantee of future results, and current performance may be lower or higher than the figures shown. For the most recent month-end Portfolio performance figures, please visit morganstanley.com/im or call 1-800-548-7786. Investment returns and principal value will fluctuate and fund shares, when redeemed, may be worth more or less than their original cost. See page 4 for the Portfolio’s standardized performance.
Global Aggregate represented by Bloomberg Global Aggregate Index (Unhedged), Global High Yield by Bloomberg Global High Yield Corporate Index, Global Investment Grade by Bloomberg Global Aggregate - Corporate Index, EM Debt by 1/3 J.P. Morgan Emerging Markets Bond Global Diversified Index; 1/3 J.P. Morgan GBI-EM Global Diversified Index; 1/3 J.P. Morgan CEMBI Broad Diversified Index. The indexes are provided for illustrative purposes only and are not meant to depict the performance of a specific investment. See Disclosure section for index definitions.
The Global Fixed Income Team’s Views on Inflation
The global economic recovery has been underwritten by expectations of continued fiscal and monetary policy support. Inflation has surged to multi-year highs, but most of this increase is expected to be transitory, and not something central banks have said they will respond to. However, there is a risk that they will change their mind, both because the inflation figures have been far stronger than expected, and because there is a risk that the inflation shock turns out to be more persistent than expected.
While inflation has continued to surprise to the upside, it is still our view that the surge is mainly transitory due to base effects, higher commodity prices, temporary bottlenecks in the economy and statistical issues. However, we expect the current high elevated inflation to continue, with year-over-year rates beginning to decline in 2H22. In the coming months, we also expect central banks to begin to slow or will have announced their intention to begin slowing asset purchases. Nevertheless, there is a risk that inflation is persistently higher going forward due to: 1) higher housing and accommodation costs, which tend to be sticky; 2) higher wages and labor costs, due to the economic scarring from COVID (lower participation rates); and 3) higher inflation expectations. Even if inflation, and inflation expectations, just return to 2010-15 levels, this should cause a significant repricing in fixed income markets.
Components of inflation like shelter/ accommodation costs and other prices that have historically been “sticky” (i.e., do not fluctuate much) have started to increase (Display 3). If price levels remain sticky, then this may drive wages higher that may create inflation risks longer term. Display 4 conveys that the average weekly earnings are rising, especially for lower-paid workers due to the shortages of workers (particularly in the services industries). In fact, data from the Federal Reserve Bank of Atlanta shows that median hourly wages for people in the bottom 25 percent of earners have risen at a 4.6 percent rate in the past year, compared to 2.8 percent for the top 25 percent.1 Furthermore, the Fed’s index of common inflation expectations (CIE) is now slightly above the 2 percent levels, after staying well below persistently prior to the recent surge in inflation risks (Display 5).
If the inflation shock persists, there is a risk that bond yields will start to rise. However, for now, the backdrop for the U.S. Treasury (UST) market remains sanguine. We believe for most of 2H21 we will see UST 10y yields in a range between 1.75% and 2.00%. We believe the surge in yields is likely behind us, with the peaks in growth, inflation and rate of fiscal spending seen in 1H21. Now, with the peaks likely behind us, the base effects for growth, inflation and fiscal spending will be harder to surpass and represent a de facto tightening of support programs and facilities. Additionally, tapering of asset purchases will begin in the U.S. in November, as expected.
Source: MSIM, Bloomberg. As of October 31, 2021. U.S. Shelter based on component of Consumer Price Index (CPI). Please see Definitions on page 6 for full definition.
Source: Bloomberg. As of October 31, 2021. Based on U.S. Average Weekly Earnings Total YoY Index (USWEYOY Index)
Source: MSIM, Bloomberg. As of October 31, 2021. Forecasts/estimates are based on current market conditions, subject to change, and may not necessarily come to pass.
Performance data quoted represents past performance, which is no guarantee of future results, and current performance may be lower or higher than the figures shown. For the most recent month-end performance figures, please visit morganstanley.com/im or call 1-800-548-7786. Investment returns and principal value will fluctuate and fund shares, when redeemed, may be worth more or less than their original cost.
The gross expense ratio is 0.56% for Class I shares and the net expense ratio is 0.56%. Where the net expense ratio is lower than the gross expense ratio, certain fees have been waived and/or expenses reimbursed. These waivers and/or reimbursements will continue for at least one year from the date of the applicable fund’s current prospectus (unless otherwise noted in the applicable prospectus) or until such time as the fund’s Board of Trustees acts to discontinue all or a portion of such waivers and/or reimbursements. Absent such waivers and/or reimbursements, returns would have been lower. Expenses are based on the fund’s current prospectus. The minimum initial investment is $5,000,000 for Class I shares.
Returns are net of fees and assume the reinvestment of all dividends and income. Performance of other share classes will vary.
Blended Index performance shown is calculated using the Bloomberg Global Aggregate Index from inception through 12/31/2016 and the Bloomberg Global Aggregate Hedged USD Index thereafter.
Risk Considerations
There is no assurance that a portfolio will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market values of securities owned by the portfolio will decline and that the value of portfolio shares may therefore be less than what you paid for them. Market values can change daily due to economic and other events (e.g. natural disasters, health crises, terrorism, conflicts and social unrest) that affect markets, countries, companies or governments. It is difficult to predict the timing, duration, and potential adverse effects (e.g. portfolio liquidity) of events. Accordingly, you can lose money investing in this portfolio. Please be aware that this portfolio may be subject to certain additional risks. Fixed-income securities are subject to the ability of an issuer to make timely principal and interest payments (credit risk), changes in interest rates (interest-rate risk), the creditworthiness of the issuer and general market liquidity (market risk). In a rising interest-rate environment, bond prices may fall and may result in periods of volatility and increased portfolio redemptions. In a declining interest-rate environment, the portfolio may generate less income. Longer-term securities may be more sensitive to interest rate changes. Mortgage and asset-backed securities are sensitive to early prepayment risk and a higher risk of default and may be hard to value and difficult to sell (liquidity risk). They are also subject to credit, market and interest rate risks. Some U.S. government securities are not backed by the full faith and credit of the U.S., thus these issuers may not be able to meet their future payment obligations. High yield securities Investments in securities rated below investment grade present greater risk of loss to principal and interest than investment in higher-quality securities. Public bank loans are subject to liquidity risk and the credit risks of lower rated securities. Foreign securities are subject to currency, political, economic and market risks. The risk of investing in emerging market countries are greater than risks associated with investments in foreign developed countries. Sovereign debt securities are subject to default risk. Derivative instruments may disproportionately increase losses and have a significant impact on performance. They also may be subject to counterparty, liquidity, valuation, correlation and market risks. Restricted and illiquid securities may be more difficult to sell and value than publicly traded securities (liquidity risk). Collateralized mortgage obligations. Due to the possibility that prepayments will alter the cash flows on CMOs, it is not possible to determine in advance their final maturity date or average life. In addition, if the collateral securing the CMOs or any third party guarantees are insufficient to make payments, the strategy could sustain a loss.
Please consider the investment objective, risks, charges and expenses of the Fund carefully before investing. The prospectus contains this and other information about the Fund. To obtain a prospectus, download one at morganstanley.com/im or call 1-800-548-7786. Please read the prospectus carefully before investing.