Home / Deeper Thought / Franklin Templeton: Fixed Income Views

The Fixed Income team no longer projects a technical recession in the United States, and the trajectory of disinflation in both the United States and euro area will flatten—primarily due to wage pressures stemming from record low unemployment—and central banks are thus likely to keep rates higher for longer.

Since our last publication, we have upgraded our view on both the US and euro area (EA) economies, and we are no longer projecting a technical recession in the former. Where we break from market consensus is in our view on the US Federal Reserve’s (Fed’s) path to monetary policy normalization. The market appears to be confident in the Fed’s ability to orchestrate a “soft landing” that would allow the Fed to cut interest rates throughout next year. We feel the trajectory of disinflation in both the United States and EA will flatten—and central banks are thus likely to keep rates higher for longer. 

Spreads in fixed income sectors are pricing in a quite sanguine environment, with levels leaning toward long-term averages, much tighter than previous periods of stress. We retain the view that both active portfolio management and superior security selection will be the main drivers of returns for investors.