Analyses
Analyses macroéconomiques
Volatility May Rise as Prices Decipher the Fed
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Market Pulse
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juin 2019
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Volatility May Rise as Prices Decipher the Fed
The economic data that are close by, i.e. coming out in the next several weeks, are not likely to reveal any dramatic weakness such that the U.S. Federal Reserve (Fed) would be compelled to cut rates. However, if one extrapolates the risks for potential economic weakness due to U.S.-China trade policies over the next several months and quarters, defined as the near-term from the Fed’s perspective, then cutting rates sooner to insure against anticipated future weakness may be an appropriate response. This presents a conflict between the market and the Fed, where the market is counting on sooner and quicker rate cuts, while the Fed may be inclined to cut later and more slowly. As such, volatility may rise as asset prices reconcile the timing and degree of policy support from the Fed.
Our Highest Conviction Views: We believe rates will remain low, U.S. consumer strength will continue, and there is low recession risk and thus low default risk.
- Non-Agency Mortgage-Backed Securities (MBS): Credit fundamentals remain strong.
- a. The unemployment rate has stayed low, while incomes are rising.
- b. Default rates and delinquencies have remained low.
- c. Housing is still affordable based on affordability indices.
- d. Housing supply remains low.
- Corporate Credit: We have a domestic real economy bias, and favor higher quality.
- a. Investment grade
- i) Financials: good fundamentals, yield per unit of credit risk, and cash flows.
- ii) Communications: mainly delevering stories.
- iii) Basic industries: metals and mining.
- b. High yield: We like building products, gaming (stable), and transports. We favor higher quality, with a BB bias.
- a. Investment grade
Under the Radar Opportunities
- Emerging markets, specifically Central Eastern Europe: Czech Republic, Hungary and Poland.
- These economies have been robust with rising inflation and seem disconnected from the risk of global slowing.
- These are attractive high quality bonds to own (all investment grade rated) because they may re-connect to the global cycle if it weakens further.
Biggest Risk: A slowdown in China below a 6% threshold.
- China needs GDP growth above 6% to keep job growth stable at 13 million in 2019.
- Sub-6% GDP growth likely leads to a labor force contraction–and the government will need to respond.
- A portion of the Chinese government stimulus may be consumed internally (social policies to meet basic needs), which means the rest of the world receives fewer external benefits from China's stimulus.
- This could weigh on global growth, and tighten global financial conditions more than currently expected.
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 may therefore be less than what you paid for them. 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 the current rising interest-rate environment, bond prices may fall and may result in periods of volatility and increased portfolio redemptions. Longer-term securities may be more sensitive to interest rate changes. In a declining interest-rate environment, the portfolio may generate less income. 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. 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. High-yield securities (“junk bonds”) are lower-rated securities that may have a higher degree of credit and liquidity risk. 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 risks 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).
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.
NOT FDIC INSURED | OFFER NO BANK GUARANTEE | MAY LOSE VALUE | NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY | NOT A DEPOSIT