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Global Fixed Income Bulletin
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July 14, 2023

Are we there yet?

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July 14, 2023

Are we there yet?


Global Fixed Income Bulletin

Are we there yet?

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July 14, 2023

 
 

June saw volatility continue to dissipate, which bolstered the market’s demand for riskier assets. The VIX ended the month with a 13 handle and most major stock indices ended the month in positive territory. Developed market yields were higher over the month, emerging market yields fell, and credit spreads tightened. Economic data continued to show resiliency, inflation numbers showed signs of turning over, and a general risk-on sentiment blanketed the market. 

 
 

Developed market (DM) yields were broadly higher over the month as central banks continued to play catch up to their emerging market counterparts. The European Central Bank (ECB), Reserve Bank of Australia (RBA), Bank of Canada (BoC), Bank of England (BoE), and Norges Bank all hiked during their meetings. The Fed decided to pause its rate hiking cycle, which briefly signaled to the market that the end may be near.  The reprieve was only short-lived, as hawkish rhetoric and the dot plot they released towards the end of the month signaled more hikes are coming soon.  

On the EM side, June was a relatively positive month for returns in both the local and external markets. EM external and corporate spreads were largely tighter over the month and local debt performed well as the USD fell 1.4% vs a basket of currencies. Hungary began cutting rates and both Chile and Brazil signaled that they are ready to cut rates in the not-so-distant future as the countries have seen inflation begin to rollover.  

Corporate credit spreads tightened over the month, with the US outperforming Europe, and high yield outperforming investment grade (IG). Most of the tightening can be attributed to the resilience of the US economy and tighter than expected labor markets. In the securitized space, current coupon spreads of agency MBS tightened 14 bps over the month, bringing year-to-date performance ahead of IG corporates and US Treasuries. Securitized credit spreads remained largely unchanged.  

 
 
 
DISPLAY 1: Asset Performance Year-to-Date
 

Note: USD-based performance. Source: Bloomberg. Data as of June 30, 2023. The indexes are provided for illustrative purposes only and are not meant to depict the performance of a specific investment. Past performance is no guarantee of future results. See pages 11-14 for index definitions.

 
 
 
DISPLAY 2: Currency Monthly Changes Versus U.S. Dollar
 

Note: Positive change means appreciation of the currency against the USD. Source: Bloomberg. Data as of June 30, 2023.

 
 
 
DISPLAY 3: Major Monthly Changes in 10-Year Yields and Spreads
 

Source: Bloomberg, JPMorgan. Data as of June 30, 2023

 
 

Fixed Income Outlook

Despite central bank behavior and rhetoric remaining focused on too high inflation, inflation data improved significantly. Disinflationary momentum is a major change from last year’s massive inflation shock, when high and rising inflation undermined both equities and bonds. Indeed, records were broken regarding the magnitude and correlation of negative asset price moves: a generational inflation shock triggered a once-in-a-generation asset price shock. This year the opposite has happened. Significant inflation deceleration has supported strong asset price appreciation: equities up double digits and high yield bonds returning over 5% through mid-year, despite continued central bank tightening.

A key driver of this “goldilocks light” environment with all assets (save a few challenged sectors like commercial office) performing well has been continued economic growth. Markets have been on recession alert for over six months with expectations having centered on a second half 2023 arrival. It has not happened and forecasts keep pushing it forward. The resiliency of economic growth during a historically unprecedented monetary tightening cycle has been one of the big surprises in 2023.  We can expect risk assets (equities, high yield, emerging markets) to continue avoiding major selloffs if economies, particularly the US and Europe, avoid meaningful recession, defined as significant rises in unemployment. So far so good. But crunch time will arrive later in 2023 as the cumulative effects of central bank tightening continue to bite and residual strength from pandemic fiscal policy support wanes if not disappears. Recession risks remain, but in our view remain overblown in terms of their likely severity.

Many of the difficulties in navigating financial markets relate to the peculiarities of this economic cycle. Economies are still equilibrating post pandemic. Manufacturing output is very weak. Using US data from the ISM survey, it is in recession. On the other hand, service sector spending remains strong with the ISM service survey remaining in expansionary territory. This combination is unusual. The question is how long it can last. Recent US data on the consumer has begun to show some weakness: restaurant spending is down, credit card and loan delinquencies are rising (although still low), bank lending is slowing as is consumer durable purchases. We believe the good news is that this bodes well for inflation because if consumer spending does not slow, neither will inflation. Policy is working. Is it enough?

The major risk for bonds going forward is inflation does not fall fast enough for central banks, necessitating higher policy rates and additional economic weakness, potentially leading to recession. Markets, having resisted central bank forecasts of ever-rising policy rates, have had to give into the reality that central banks mean what they say, and show no signs of stopping raising rates. The Fed paused in June, but it emphasized it was a skip and not an indication that they were done. In the UK, high inflation has pushed the expected terminal policy rate over 6%! The highest since the turn of the century. Of course, inflation has not been this high for an even longer time.

A major challenge for policymakers and investors is knowing how high is high enough. To answer the question two things must be known. First, the target. We know that. Most country’s central banks have a 2% inflation target using some variation of core inflation. They seem intent on getting back to it. Second (more challenging), over what time frame and at what cost do they want to get to 2%. Each central bank probably has different preferences depending on their specific circumstances. The more willing a central bank is to lengthen the time frame in getting back to target means lower probability of recession and less chance of a policy overshot. We believe most central banks, including the Fed and ECB, are NOT in a rush to crush their economies to get inflation to target by end 2024.  Both central banks forecast targeting inflation to be ABOVE target at end 2024, suggesting patience. Medium term risks of an economic slowdown remain, with the impact of tighter lending conditions, tight monetary policy and a slowing labor market picture still to be fully felt by consumers and corporates. We envision a moderate recession in 2024 with no dramatic rise in defaults or risk premium - maybe a semi-soft landing?

Government bond yields are getting more attractive. US Treasury 2-year yields moved back over 5% in early July, the highest they have been since 2006.  Real interest rates, as measured by US TIPS, are also at decade plus highs. Indeed, one measure of monetary policy success is how much real yields have risen. They are now up almost 3% from March 2022 lows. Fed policy is working. US nominal 10-year yields breached 4% once again in early July. Not quite at their 2022 peak, but meaningfully higher. Similar moves occurred in other developed markets. Currently, our strategy is to remain modestly underweight interest rate risk, as evidence that labor markets are loosening enough to slow economies sufficiently remains scant. That said, we are analyzing data carefully for evidence that policy rates are high enough. On the other hand, emerging markets have performed very well in recent months, and we expect their outperformance versus developed markets to continue. But, if higher real yields are required to break the back of developed country inflation, lower EM yields may have to wait.

Our strategy remains one of taking risk where opportunities suggest adequate yield to compensate for unexpected volatility or surprising bad news, whether geopolitical, economic or policy induced. Corporate bonds both IG and high yield had a strong second quarter. We do not believe spreads will tighten further in the third quarter. However, we do not see risk of a meaningful sell-off in IG bonds. Given the broader economic headwinds, but still positive momentum, we see carry rather than capital appreciation as the likely driver of IG corporate returns in the second half of 2023.  High yield bond’s strong performance year to date suggests that with economic headwinds likely increasing in the second half of the year, their performance is likely to deteriorate. We are taking a more idiosyncratic approach to high yield, avoiding lower spread, more generic credits.

The securitized credit outlook has also modestly deteriorated as US household balance sheets come under more pressure and excess savings are run down. We still think it offers the most compelling opportunities. We are trying to take advantage of higher yields on higher quality issuers to achieve our target returns, rather than venture down the risk/rating spectrum. Our favorite category of securitized credit remains non-agency residential mortgages, despite challenging home affordability. Somewhat surprisingly, US housing looks like it may have bottomed out.

Recent upwards movements in yields and incipient Eurozone economic weakness have not helped the U.S. dollar. We continue to like being underweight the U.S. dollar, over the longer term, versus a basket of mostly emerging market currencies. However, given EM’s strong year to date performance, we are not in a rush to increase exposure. We also continue to like emerging market local government bonds versus hard currency debt and developed market government bonds.

Developed Market Rate/Foreign Currency

Monthly Review
Developed market rates were broadly higher in June with curves sharply flattening as hawkish central banks continued to emphasize that the hiking cycle was not yet over.  10-year US Treasury bonds were up 19 bps, 10-year German bunds were up 11 bps, 10-year UK gilts were up 20 bps, and Australian 10-year bonds underperformed, up 42 bps. The US 2/10s yield curve inverted ~30 bps, beyond –100 bps once again. Central banks fought back against market pricing of near-term rate cuts and highlighted that rates would have to go higher. The Fed at the June meeting opted to pause or “skip”, deciding to keep the policy rate the same, but also indicating in the dot plot and subsequent speeches that it expected that one or more hikes would be required later in 2023. The ECB hiked 25 bps as expected but was hawkish in its messaging. Other central banks were more aggressive in their policy decisions. The BoC surprised markets, hiking 25b ps after pausing since January 2023. The RBA similarly surprised markets again, hiking for the second consecutive meeting after pausing in March. Likewise, in Europe, the BoE and Norges Bank surprised markets, hiking 50 bps versus expectations for 25 bps.1

Outlook
Overall, the story was broadly similar in June: economies were surprisingly resilient, inflation was still elevated, and labor markets (while likely past peak tightness) were still tight. As a result, central banks reacted now or highlighted a hawkish narrative to prevent getting further behind the curve. The risk of a hard landing recession has not completely gone away. Central banks have now hiked rates considerably and monetary policy may have lagged impacts which have not yet been fully felt. Further, while the banking sector crisis in the US has largely receded, credit conditions are still tight and may tighten even further, putting increased pressure on borrowers. Given the uncertainty, it is difficult to concretely express an outright view on interest rates. We continue to recommend patience, awaiting further clarification while taking advantage of more relative dislocations. In terms of foreign exchange, the U.S. dollar weakened slightly during June. We have thought and still believe that the U.S. dollar should weaken, although tactically have made adjustments where attractive.

Emerging Market Rate/Foreign Currency

Monthly Review
Emerging Markets debt delivered positive returns for June. Hungary cut rates and Chile is signaling they will start cutting next month. China’s economic rebound is materializing to be disappointing as the recovery has been shallow and short-lived. In Russia, the Wagner advance on the capital was the most significant event to happen for Russia since the war began. This could be a destabilizing event and has had a positive effect on Ukraine. Sovereign and corporate spreads compressed month- over-month and outflows from the asset class continued.2

Outlook
We remain cautiously optimistic on the asset class. The US Fed has turned slightly more hawkish following the June meeting, but many EM central banks have started to cut rates or are still in a position to cut rates. Interest rate differentials have compressed a bit but performance continued to be positive in the second quarter. There was positive progress for debt restructuring in Suriname, Zambia, and Sri Lanka during the quarter. Divergence between countries and credits is still wide so bottom-up analysis is critical.

Corporate Credit

Monthly Review
US IG spreads outperformed Euro IG spreads again this month amidst a credit market rally driven by numerous factors. Firstly, there were several economic data surprises (particularly in the U.S.), exceeding weak expectations with the labour markets remaining strong and inflation starting to fall. Secondly, corporate news was in general bondholder friendly. Finally, general risk sentiment improved as there were no major geo-political escalations, risks of a recession accompanied by a spike in defaults receded, and equity market volatility fell to pre-Covid levels.3

June was a strong month for global high yield markets, characterized by material outperformance of the higher-beta, more distressed segments of the market, particularly in the U.S. The technical conditions in high yield improved in June amid a slowdown in activity in the primary market and robust demand. The lower quality segments of the market generally outperformed again in June, after also outperforming in April and May.4

Global convertibles participated in the broad-based rally in June, with the Refinitiv Global Convertibles Focus Index rising 3.92%.5

Outlook
We foresee a summer squeeze driven by light supply and continued demand for yield followed by a stormier winter as tighter monetary policy, tighter lending conditions and lower profit margins impact sentiment resulting in attractive carry, but limited capital gains. While an economic slowdown seems likely, the magnitude and impact on downgrades/defaults is likely low as a combination of strong employment and conservative corporate management support markets.

We are reaffirming our cautious stance on the high yield market as we enter the third quarter of 2023. Over the short-term, it appears the average spread in the high yield market could grind lower driven by temporarily supportive technical conditions. However, we anticipate the market will contend with periods of elevated stress and volatility over the near-to-intermediate term due to several factors.

For Convertibles, volatility is currently low and is far more likely to increase than decrease, which should benefit the converts market as the option component of converts tends to become more valuable as volatility increases.

Securitized Products

Monthly Review
Within securitized, fundamental credit conditions remain stable despite recession risks. Although delinquencies across many asset classes are increasing slowly, overall delinquencies remain low from a historical perspective, and we believe delinquency and default levels will remain non-threatening to the large majority of securities. Agency MBS spreads tightened, while securitized credit spreads were generally unchanged. New issue and secondary trading activity was steady in June, but overall, 2023 volumes have been well below 2022 levels. The Bloomberg MBS Index returned -0.43% in June and is now up 1.87% year-to-date in 2023. US non-agency RMBS spreads were largely unchanged in June and remain wide by historical comparison. US ABS spreads tightened slightly in June, for both consumer and business-oriented ABS, but still lagged the broader spread tightening across fixed income during the month. The European securitized market remained active in June, primarily in RMBS and ABS. Supply continues to be met with healthy demand and European spreads remained stable.6

Outlook
We remain concerned about global economic conditions, and we expect employment rates to decline and households to experience greater stress. We have moved up in credit quality over the past few months, reducing credit risk while taking advantage of wider spreads for highly-rated securities. We continue to believe that the fundamental credit conditions of residential mortgage markets remain sound, but also believe that higher risk premiums are warranted across all credit assets given projected economic weakness. Securitized yields remain at historically wide levels, and we believe these wider spreads offer more than sufficient compensation for current market risks. Our favorite sector remains residential mortgage credit, despite our expectation that US home prices will likely fall another 5-10% in 2023. We remain more cautious on commercial real estate, especially office, which continues to be negatively impacted in the post-pandemic world.

 
 

The views and opinions expressed are those of the Portfolio Management team as of June 2023 and are subject to change based on market, economic and other conditions. Past performance is not indicative of future results.

1Source: Bloomberg. Data as of June 30, 2023.
2Source: Bloomberg. Data as of June 30, 2023. EM corporates represented by The JP Morgan CEMBI Broad Diversified Index.
3Source: Bloomberg Indices: U.S Corporate Index and the European Aggregate Corporate Index. Data as of June 30, 2023.
4Source: J.P. Morgan and Bloomberg US Corporate High Yield Index. Data as of June 30, 2023.
5Source: Bloomberg and Refinitiv Global Convertibles Focus Index. Data as of June 30, 2023.
6Source: Bloomberg. Data as of June 30, 2023.

 
 
 
Our fixed income investment capabilities are driven by seven specialized teams – Agency MBS, Broad Markets Fixed Income, Emerging Markets, Floating-Rate Loans, High Yield, Municipals, and Securitized – which span the global fixed income capital markets.
 
 
 
Featured Fund
 
 
 
 
 

Risk Considerations

Diversification neither assures a profit nor guarantees against loss in a declining market.

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 a portfolio. 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. Certain U.S. government securities purchased by the strategy, such as those issued by Fannie Mae and Freddie Mac, are not backed by the full faith and credit of the U.S. It is possible that these issuers will not have the funds to meet their payment obligations in the future. Public bank loans are subject to liquidity risk and the credit risks of lower-rated securities. High-yield securities (junk bonds) are lower-rated securities that may have a higher degree of credit and liquidity risk. Sovereign debt securities are subject to default risk. 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. The currency market is highly volatile. Prices in these markets are influenced by, among other things, changing supply and demand for a particular currency; trade; fiscal, money and domestic or foreign exchange control programs and policies; and changes in domestic and foreign interest rates. Investments in foreign markets entail special risks such as currency, political, economic and market risks. The risks of investing in emerging market countries are greater than the risks generally associated with foreign investments. Derivative instruments may disproportionately increase losses and have a significant impact on performance. They also may be subject to counterparty, liquidity, valuation, and correlation and market risks. Restricted and illiquid securities may be more difficult to sell and value than publicly traded securities (liquidity risk). Due to the possibility that prepayments will alter the cash flows on collateralized mortgage obligations (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 portfolio could sustain a loss.

 
 

DEFINITIONS
Basis point:
One basis point = 0.01%.

INDEX DEFINITIONS
The indexes shown in this report are not meant to depict the performance of any specific investment, and the indexes shown do not include any expenses, fees or sales charges, which would lower performance. The indexes shown are unmanaged and should not be considered an investment. It is not possible to invest directly in an index.

“Bloomberg®” and the Bloomberg Index/Indices used are service marks of Bloomberg Finance L.P. and its affiliates, and have been licensed for use for certain purposes by Morgan Stanley Investment Management (MSIM). Bloomberg is not affiliated with MSIM, does not approve, endorse, review, or recommend any product, and does not guarantee the timeliness, accurateness, or completeness of any data or information relating to any product.

The Bloomberg Euro Aggregate Corporate Index (Bloomberg Euro IG Corporate) is an index designed to reflect the performance of the euro-denominated investment-grade corporate bond market.

The Bloomberg Global Aggregate Corporate Index is the corporate component of the Bloomberg Global Aggregate index, which provides a broad-based measure of the global investment-grade fixed income markets.

The Bloomberg U.S. Corporate High Yield Index measures the market of USD-denominated, non-investment grade, fixed-rate, taxable corporate bonds. Securities are classified as high yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below. The index excludes emerging market debt.

The Bloomberg U.S. Corporate Index is a broad-based benchmark that measures the investment grade, fixed-rate, taxable, corporate bond market.

The Bloomberg U.S. Mortgage Backed Securities (MBS) Index tracks agency mortgage-backed pass-through securities (both fixed-rate and hybrid ARM) guaranteed by Ginnie Mae (GNMA), Fannie Mae (FNMA) and Freddie Mac (FHLMC). The index is constructed by grouping individual TBA-deliverable MBS pools into aggregates or generics based on program, coupon and vintage. Introduced in 1985, the GNMA, FHLMC and FNMA fixed-rate indexes for 30- and 15-year securities were backdated to January 1976, May 1977 and November 1982, respectively. In April 2007, agency hybrid adjustable-rate mortgage (ARM) pass-through securities were added to the index.

Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care.

Euro vs. USD—Euro total return versus U.S. dollar.

German 10YR bonds – Germany Benchmark 10-Year Datastream Government Index; Japan 10YR government bonds – Japan Benchmark 10-Year Datastream Government Index; and 10YR U.S. Treasury – U.S. Benchmark 10-Year Datastream Government Index.

The ICE BofAML European Currency High-Yield Constrained Index (ICE BofAML Euro HY constrained) is designed to track the performance of euro- and British pound sterling-denominated below investment-grade corporate debt publicly issued in the eurobond, sterling.

The ICE BofAML U.S. Mortgage-Backed Securities (ICE BofAML U.S. Mortgage Master) Index tracks the performance of U.S. dollar-denominated, fixed-rate and hybrid residential mortgage pass-through securities publicly issued by U.S. agencies in the U.S. domestic market.

The ICE BofAML U.S. High Yield Master II Constrained Index (ICE BofAML U.S. High Yield) is a market value-weighted index of all domestic and Yankee high-yield bonds, including deferred-interest bonds and payment-in-kind securities. Its securities have maturities of one year or more and a credit rating lower than BBB-/Baa3, but are not in default.

The ISM Manufacturing Index is based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. The ISM Manufacturing Index monitors employment, production inventories, new orders and supplier deliveries. A composite diffusion index is created that monitors conditions in national manufacturing based on the data from these surveys.

Italy 10-Year Government Bonds – Italy Benchmark 10-Year Datastream Government Index.

The JP Morgan CEMBI Broad Diversified Index is a global, liquid corporate emerging markets benchmark that tracks U.S.-denominated corporate bonds issued by emerging markets entities.

The JPMorgan Government Bond Index – emerging markets (JPM local EM debt) tracks local currency bonds issued by emerging market governments. The index is positioned as the investable benchmark that includes only those countries that are accessible by most of the international investor base (excludes China and India as of September 2013).

The JPMorgan Government Bond Index Emerging Markets (JPM External EM Debt) tracks local currency bonds issued by emerging market governments. The index is positioned as the investable benchmark that includes only those countries that are accessible by most of the international investor base (excludes China and India as of September 2013).

The JP Morgan Emerging Markets Bond Index Global (EMBI Global) tracks total returns for traded external debt instruments in the emerging markets and is an expanded version of the EMBI+. As with the EMBI+, the EMBI Global includes U.S. dollar-denominated Brady bonds, loans and eurobonds with an outstanding face value of at least $500 million.

The JP Morgan GBI-EM Global Diversified Index is a market-capitalization weighted, liquid global benchmark for U.S.-dollar corporate emerging market bonds representing Asia, Latin America, Europe and the Middle East/Africa.

JPY vs. USD – Japanese yen total return versus U.S. dollar.

The Nikkei 225 Index (Japan Nikkei 225) is a price-weighted index of Japan’s top 225 blue-chip companies on the Tokyo Stock Exchange.

The MSCI AC Asia ex-Japan Index (MSCI Asia ex-Japan) captures large- and mid-cap representation across two of three developed markets countries (excluding Japan) and eight emerging markets countries in Asia.

The MSCI All Country World Index (ACWI, MSCI global equities) is a free float-adjusted market capitalization weighted index designed to measure the equity market performance of developed and emerging markets. The term “free float” represents the portion of shares outstanding that are deemed to be available for purchase in the public equity markets by investors. The performance of the Index is listed in U.S. dollars and assumes reinvestment of net dividends.

MSCI Emerging Markets Index (MSCI emerging equities) captures large-and mid-cap representation across 23 emerging markets (EM) countries.

The MSCI World Index (MSCI developed equities) captures large and mid-cap representation across 23 developed market (DM) countries.

Purchasing Managers Index (PMI) is an indicator of the economic health of the manufacturing sector.

The Refinitiv Convertible Global Focus USD Hedged Index is a market weighted index with a minimum size for inclusion of $500 million (U.S.), 200 million (Europe), 22 billion Yen, and $275 million (Other) of Convertible Bonds with an Equity Link.

The Russell 2000® Index is an index that measures the performance of the 2,000 smallest companies in the Russell 3000 Index.

The S&P 500® Index (U.S. S&P 500) measures the performance of the large-cap segment of the U.S. equities market, covering approximately 75 percent of the U.S. equities market. The index includes 500 leading companies in leading industries of the U.S. economy.

S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index seeks to measure the value of residential real estate in 20 major U.S. metropolitan areas: Atlanta, Boston, Charlotte, Chicago, Cleveland, Dallas, Denver, Detroit, Las Vegas, Los Angeles, Miami, Minneapolis, New York, Phoenix, Portland, San Diego, San Francisco, Seattle, Tampa and Washington, D.C.

The S&P/LSTA U.S. Leveraged Loan 100 Index (S&P/LSTA Leveraged Loan Index) is designed to reflect the performance of the largest facilities in the leveraged loan market.

The S&P GSCI Copper Index (Copper), a sub-index of the S&P GSCI, provides investors with a reliable and publicly available benchmark for investment performance in the copper commodity market.

The S&P GSCI Softs (GSCI soft commodities) Index is a sub-index of the S&P GSCI that measures the performance of only the soft commodities, weighted on a world production basis. In 2012, the S&P GSCI Softs Index included the following commodities: coffee, sugar, cocoa and cotton.

Spain 10-Year Government Bonds – Spain Benchmark 10-Year Datastream Government Index.

The Thomson Reuters Convertible Global Focus USD Hedged Index is a market weighted index with a minimum size for inclusion of $500 million (U.S.), 200 million euro (Europe), 22 billion yen, and $275 million (Other) of convertible bonds with an equity link.

U.K. 10YR government bonds – U.K. Benchmark 10-Year Datastream Government Index. For the following Datastream government bond indexes, benchmark indexes are based on single bonds. The bond chosen for each series is the most representative bond available for the given maturity band at each point in time. Benchmarks are selected according to the accepted conventions within each market. Generally, the benchmark bond is the latest issue within the given maturity band; consideration is also given to yield, liquidity, issue size and coupon.

The U.S. Dollar Index (DXY) is an index of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of U.S. trade partners’ currencies.

The Chicago Board Options Exchange (CBOE) Market Volatility (VIX) Index shows the market’s expectation of 30-day volatility.

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In the EU, MSIM and Eaton Vance materials are issued by MSIM Fund Management (Ireland) Limited (“FMIL”). FMIL is regulated by the Central Bank of Ireland and is incorporated in Ireland as a private company limited by shares with company registration number 616661 and has its registered address at The Observatory, 7-11 Sir John Rogerson’s Quay, Dublin 2, D02 VC42, Ireland.

Outside the EU, MSIM materials are issued by Morgan Stanley Investment Management Limited (MSIM Ltd) is authorised and regulated by the Financial Conduct Authority. Registered in England. Registered No. 1981121. Registered Office: 25 Cabot Square, Canary Wharf, London E14 4QA.

In Switzerland, MSIM materials are issued by Morgan Stanley & Co. International plc, London (Zurich Branch) Authorised and regulated by the Eidgenössische Finanzmarktaufsicht (“FINMA”). Registered Office: Beethovenstrasse 33, 8002 Zurich, Switzerland.

Outside the U.S. and EU, Eaton Vance materials are issued by Eaton Vance Management (International) Limited (“EVMI”) 125 Old Broad Street, London, EC2N 1AR, UK, which is authorised and regulated in the United Kingdom by the Financial Conduct Authority.

Italy: MSIM FMIL (Milan Branch), (Sede Secondaria di Milano) Palazzo Serbelloni Corso Venezia, 16 20121 Milano, Italy. The Netherlands: MSIM FMIL (Amsterdam Branch), Rembrandt Tower, 11th Floor Amstelplein 1 1096HA, Netherlands. France: MSIM FMIL (Paris Branch), 61 rue de Monceau 75008 Paris, France. Spain: MSIM FMIL (Madrid Branch), Calle Serrano 55, 28006, Madrid, Spain. Germany: MSIM FMIL (Frankfurt Branch), Niederlassung Deutschland, Grosse Gallusstrasse 18, 60312 Frankfurt am Main, Germany (Gattung: Zweigniederlassung (FDI) gem. § 53b KWG).

MIDDLE EAST

Dubai: MSIM Ltd (Representative Office, Unit Precinct 3-7th Floor-Unit 701 and 702, Level 7, Gate Precinct Building 3, Dubai International Financial Centre, Dubai, 506501, United Arab Emirates. Telephone: +97 (0)14 709 7158).

U.S.

NOT FDIC INSURED | OFFER NO BANK GUARANTEE | MAY LOSE VALUE | NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY | NOT A DEPOSIT

Latin America (Brazil, Chile Colombia, Mexico, Peru, and Uruguay) This material is for use with an institutional investor or a qualified investor only. All information contained herein is confidential and is for the exclusive use and review of the intended addressee, and may not be passed on to any third party. This material is provided for informational purposes only and does not constitute a public offering, solicitation or recommendation. Do buy or sell for any product, service, security and/or strategy. A decision to invest should only be made after reading the strategy documentation and conducting in-depth and independent due diligence.

ASIA PACIFIC

Hong Kong: This material has been issued by Morgan Stanley Asia Limited for use in Hong Kong and shall only be made available to “professional investors” as defined under the Securities and Futures Ordinance of Hong Kong (Cap 571). The contents of this material have not been reviewed nor approved by any regulatory authority including the Securities and Futures Commission in Hong Kong. Accordingly, save where an exemption is available under the relevant law, this material shall not be issued, circulated, distributed, directed at, or made available to, the public in Hong Kong. Singapore: This material may not be circulated or distributed, whether directly or indirectly, to persons in Singapore other than to (i) an accredited investor (ii) an expert investor or (iii) an institutional investor as defined in Section 4A of the Securities and Futures Act, Chapter 289 of Singapore (“SFA”); or (iv) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA. This publication has not been reviewed by the Monetary Authority of Singapore. Eaton Vance Management International (Asia) Pte. Ltd. (“EVMIA”) holds a Capital Markets Licence under the Securities and Futures Act of Singapore (“SFA”) to conduct, among others, fund management, is an exempt Financial Adviser pursuant to the Financial Adviser Act Section 23(1)(d) and is regulated by the Monetary Authority of Singapore (“MAS”). Eaton Vance Management, Eaton Vance Management (International) Limited and Parametric Portfolio Associates® LLC holds an exemption under Paragraph 9, 3rd Schedule to the SFA in Singapore to conduct fund management activities under an arrangement with EVMIA and subject to certain conditions. None of the other Eaton Vance group entities or affiliates holds any licences, approvals or authorisations in Singapore to conduct any regulated or licensable activities and nothing in this material shall constitute or be construed as these entities or affiliates holding themselves out to be licensed, approved, authorised or regulated in Singapore, or offering or marketing their services or products. Australia: This publication is disseminated in Australia by Morgan Stanley Investment Management (Australia) Pty Limited ACN: 122040037, AFSL No. 314182, which accept responsibility for its contents. This publication, and any access to it, is intended only for “wholesale clients” within the meaning of the Australian Corporations Act. EVMI is exempt from the requirement to hold an Australian financial services license under the Corporations Act in respect of the provision of financial services to wholesale clients as defined in the Corporations Act 2001 (Cth) and as per the ASIC Corporations (Repeal and Transitional) Instrument 2016/396. Calvert Research and Management, ARBN 635 157 434 is regulated by the U.S. Securities and Exchange Commission under U.S. laws which differ from Australian laws. Calvert Research and Management is exempt from the requirement to hold an Australian financial services licence in accordance with class order 03/1100 in respect of the provision of financial services to wholesale clients in Australia.

Japan:

For professional investors, this document is circulated or distributed for informational purposes only. For those who are not professional investors, this document is provided in relation to Morgan Stanley Investment Management (Japan) Co., Ltd. (“MSIMJ”)’s business with respect to discretionary investment management agreements (“IMA”) and investment advisory agreements (“IAA”). This is not for the purpose of a recommendation or solicitation of transactions or offers any particular financial instruments. Under an IMA, with respect to management of assets of a client, the client prescribes basic management policies in advance and commissions MSIMJ to make all investment decisions based on an analysis of the value, etc. of the securities, and MSIMJ accepts such commission. The client shall delegate to MSIMJ the authorities necessary for making investment. MSIMJ exercises the delegated authorities based on investment decisions of MSIMJ, and the client shall not make individual instructions. All investment profits and losses belong to the clients; principal is not guaranteed. Please consider the investment objectives and nature of risks before investing. As an investment advisory fee for an IAA or an IMA, the amount of assets subject to the contract multiplied by a certain rate (the upper limit is 2.20% per annum (including tax)) shall be incurred in proportion to the contract period. For some strategies, a contingency fee may be incurred in addition to the fee mentioned above. Indirect charges also may be incurred, such as brokerage commissions for incorporated securities. Since these charges and expenses are different depending on a contract and other factors, MSIMJ cannot present the rates, upper limits, etc. in advance. All clients should read the Documents Provided Prior to the Conclusion of a Contract carefully before executing an agreement. This document is disseminated in Japan by MSIMJ, Registered No. 410 (Director of Kanto Local Finance Bureau (Financial Instruments Firms)), Membership: The Japan Securities Dealers Association, the Investment Trusts Association, Japan, the Japan Investment Advisers Association and the Type II Financial Instruments Firms Association.

 

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