Russell Investments, a leading global investment solutions firm, has released a new quarterly survey assessing fixed income managers views on where they see US core inflation in 12 months' time.

Russell Investments' latest quarterly survey of fixed income managers found that around two-thirds of respondents believe that inflation will persist in the 3 per cent to 4.5 per cent range in 12 months' time.

None of the 59 bond and currency managers who responded to the Q2 2022 survey expect US core inflation to decline below the US Federal Reserve’s  2 per cent target in the coming 12 months and less than 5 per cent expect the US Consumer Price Index to show the inflation average below 2 per cent in the next five years, the survey revealed.

The survey also found disagreement between managers on when a global recession might begin. Thirty one per cent of respondents expect it to start next year, while 27 per cent expect it to begin in 2024 and 28 per cent expect it later, the firm said.

Whilst recession is a concern, the survey found that the main concern for fixed income managers at mid-year 2022 is stagflation. As many as 58 per cent of respondents selected stagflation as their primary concern, whilst 21 per cent picked recession, the firm added.

“Fixed income managers had been surprised by the sharp move higher in interest rates," said Adam Smears, head of fixed income research at Russell Investments. "While concerns exist about the economy, it remains to be seen whether their expectations of moderate deterioration come to fruition or whether another surprise awaits,” he added

Other key findings from Russell Investments’ Q2 2022 survey include:

Investment-grade credit
Sentiment is changing as 21 per cent of managers now expect a moderate tightening, versus zero at the beginning of 2022. However, 39 per cent of managers still expect a moderate widening in spreads in the next 12 months, versus 54 per cent in the previous survey. The majority of respondents affirmed that they expect the leverage of US Better Business Bureau rated companies to increase, indicating that the deleveraging trend observed in 2021 has ended. Moreover, the share of managers that consider caution around fundamentals is warranted almost doubled to 40 per cent, surpassing the share of managers that consider spreads compensated to some degree for the deterioration in fundamentals, the survey reveals.

Global leveraged credit
The percentage of managers who expect spreads to widen moderately increased to 52 per cent, increasing from 20 per cent in the Q4 2021 survey and 47 per cent in the Q1 2022 survey. Only 5 per cent of respondents expect spreads to widen significantly. Within this market segment, 37 per cent favor the multi-credit sector, while the share that favors US high yield bonds decreased to 21 per cent from 30 per cent. Fifty per cent of managers on balance think corporate fundamentals will remain the same, whilst a sizable 40 per cent believe there will be at least a moderate deterioration, the survey shows.

Emerging markets
Managers remain constructive on emerging market currencies, with almost 55 per cent expecting a positive performance in the next 12 months and 80 per cent expecting this over the next three years. Meanwhile, 62 per cent of respondents, down from the previous 70 per cent, indicated that they favor local currency emerging market debt over hard currency emerging market debt for the next 12 months. On a regional basis, most investors continue to favor Latin America. The Turkish lira and the Russian rouble remain the least-favored currencies. Within the hard currency emerging market debt space, 57 per cent of respondents expect spreads in the HC EMD index to tighten in the next 12 months, increasing from 38 per cent in the Q1 survey. Meanwhile, 11 per cent of managers expect spreads to widen. Managers again expressed preference for Argentina, Indonesia and Egypt as the countries with the highest expected return over the next 12 months. China, the Philippines and Turkey remain the top underweight countries, the firm said.

Developed markets
Survey respondents are positive about the US dollar and Australian dollar. The majority of survey participants expect the US dollar to trade on the upper side of parity. Meanwhile, 43 per cent of respondents expect the British pound to post the worst performance among the Group of Ten currencies, the firm added.

Securitized credit
Thirty five per cent of managers plan to add risks in their return-oriented securitized portfolios in the next 12 months. The same percentage plan to maintain current positions, while 29 per cent will decrease exposure to risk. When asked about taking a meaningful beta position, 47 per cent said they already have a short bias in their portfolios, up from 9 per cent in the previous survey. Conversely, only 20 per cent already have a long position, down from 73 per cent in the previous survey. Meanwhile, the percentage that expect non-agency spreads to tighten increased from 14 per cent in January 2022 to 30 per cent in June, the percentage that expect spreads to remain range-bound decreased from 43 per cent to 24 per cent, and the percentage that expect spreads to widen increased slightly from 43 per cent to 47 per cent, the firm stressed.

Based in Seattle, Russell Investments is a global investment solutions firm with ÂŁ247.8 billion ($298 billion) in assets under management as of March 31, 2022, providing a range of investment capabilities to institutional investors, financial intermediaries, and individual investors around the world.