Morgan Stanley IM: Are we there yet?

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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.

^{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.}