2023-06-27 16:02:29 ET
J.P. Morgan Asset Management's Global Fixed Income, Currency and & Commodities Investment team lowered their outlook for a recession in Q3 to 55% from 60% and raised the likelihood of sub-trend growth to 40% from 35%, when they met for their quarterly outlook meeting recently.
"Recession remained our base case," Bob Michele, chief and investment officer and head of the Global Fixed Income, Currency & Commodities Group at J.P. Morgan Asset Management, said in a note. "While the central banks are committed to bringing inflation down to 2% and willing to sacrifice the economy to get to that level, the group appreciated that it is taking longer to work through several years of accumulated policy stimulus."
Nevertheless, leading indictors continue to see a recession as the most likely outcome.
Taking into consideration the outlook for more central bank rate hikes and the inverted yield curve, "agency mortgage-backed were our top pick," Michele said. "While the technicals of Fed balance sheet runoff, FDIC selling, and lower bank demand are challenging, valuations are at their cheapest level since the height of the global financial crisis."
Local emerging market debt also received some attention, he said. "Despite its good performance year-to-date, the sector seems to be unloved and under-owned by crossover buyers."
The lead portfolio managers and sector specialists considered risk assets and specifically high-yield bonds but decided "at current levels high yield was priced for a soft landing and did not adequately protect us if a recession occurred in the time horizon we expected."
With the regional banking crisis calmed, central banks have returned their focus to inflation. "The signs of recession are mounting, although the eventual timing may be pushed into 1Q 2024," Michele said. "Adding risk here appears to be the equivalent of picking up nickels in front of a steamroller."
Among REITs investing in agency mortagage-backed securities: AGNC Investment ( NASDAQ: AGNC ) shares rose 1.3 % on Tuesday; Annaly Capital Management ( NYSE: NLY ), +1.4% ; Armour Residential REIT ( NYSE: ARR ), +2.4% ; Orchid Island Capital ( NYSE: ORC ), +2.2% ; and Dynex Capital ( NYSE: DX ), +2.0% .
More on Agency MBS:
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AGNC Preferred About to Yield 11.88% Upon Conversion to Floating
- 2023 February U.S. MBS Agency Market Recap: Rising Vols/Rates Erodes Gains, Dormant Slack Beholden to Rallies
For further details see:
J.P. Morgan Global FICC team chooses agency MBS as top pick in Q3 outlook