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CONTRIBUTORS

Josh Lohmeier, CFA

Portfolio Manager, Investment Grade
Franklin Templeton Fixed Income
United States

George Bailey

Portfolio Manager, Investment Grade, Franklin Templeton Fixed Income

Mike Cho

Portfolio Manager, Investment Grade, Franklin Templeton Fixed Income

Kathryn Bartelt

Investment Marketing Director, Franklin Templeton Fixed Income

Introduction

The investment-grade market closed on an encouraging note in 2023 despite considerable volatility in interest rates and spreads, but ongoing uncertainty surrounding factors such as the Federal Reserve’s (Fed's) next actions, inflation, and growth makes 2024 a complex landscape to navigate. Franklin Templeton's Investment Grade team discusses their 2024 outlook, highlighting opportunities, areas of risk, and surprises within the investment grade space for the coming year.

Summary

In 2024, the US Investment Grade Credit team estimates the asset class may generate total return between 4%–5%, reflective of current yield levels and limited potential for any further spread tightening given current valuations. The team does identify structural opportunities that exist across long-duration high-quality, intermediate mid-beta, and short-duration higher-beta risk.

Several potential headwinds may challenge the asset class in 2024, notably a potential slowdown in consumer spending contributing to a slower growth environment, as well as an increase in new issue supply. These risks may impact specific sectors of the economy differently and may result in greater spread dispersion across sectors and companies.

Surprises that could impact the investment-grade markets in 2024 include scenarios where lower interest rates trigger a wave of debt-funded mergers and acquisitions or share buybacks. Inversely, an unexpected increase in interest rates, contrary to consensus forecasts for lower yields, along with heightened geopolitical risks could result in further volatility. With corporate credit spreads trading below historical averages at levels that seem to have a “goldilocks” soft-landing scenario priced in, this infers limited capacity for the market to absorb potential surprises.

For more insight, watch the video featuring Franklin Templeton Fixed Income’s Josh Lohmeier, George Bailey, and Mike Cho, who discuss the Investment Grade team’s 2024 outlook.

WHAT ARE THE RISKS?

Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls. Changes in the credit rating of a bond, or in the credit rating or financial strength of a bond’s issuer, insurer or guarantor, may affect the bond’s value.

IMPORTANT LEGAL INFORMATION

This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. This material may not be reproduced, distributed or published without prior written permission from Franklin Templeton.

The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The underlying assumptions and these views are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. There is no assurance that any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets will be realized. The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested. Past performance is not necessarily indicative nor a guarantee of future performance. All investments involve risks, including possible loss of principal.

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