Mitsubishi UFJ Financial Group’s U.S. macro strategy team released its 2024 outlook report, titled “Getting Back in Sync?” The report provides a forward-looking perspective on the U.S. fixed income markets and the macroeconomic factors impacting the U.S. economy in the next 12 months.

“The U.S. economy has dodged exogenous shocks relatively well so far, but in our view, many segments in the economy are still out of sync,” George Goncalves, head of U.S. macro strategy at MUFG, said.

In the report, Goncalves and the rest of the firm’s macro strategy team looked at the various economic scenarios for 2024, writing that the best case is a mild U.S. recession — a bumpy landing — for next year.

“Although still our base-case, we have been taking down our recession odds post the height of the regional banking crisis,” Goncalves said. “Lending has stalled, but we did not have a fire-sale event nor a credit crunch. Overall, it is possible to dodge a recession if the Federal Reserve and fiscal agents are to ease even further and if bank lending returns. Yet, that seems unlikely for now, so we see more of a mild recession before sustained growth.”

Key Takeaways for Fixed Income Markets

• In rates, MUFG’s macro strategy team believes that investors need to triangulate when interest rate cuts begin and how far the Fed will drop rates vs. negative carry considerations. MUFG believes the Fed needs to re-steepen the curve. Thus, the team’s favorite ideas revolve around finding the most optimal curve trades.
• In mortgages, MUFG remains constructive on the mortgage-backed-securities-basis. However, the macro strategy team is mindful of the risk that prepays pick up. Mortgage-back securities should outperform credit.
• In investment grade, MUFG believes the product will lag in a rates rally, which could serve to widen spreads at times, with supply mattering once more.
• In high yield credit, performance will come down to U.S. economic health and whether liquidity will still flow into risk assets. Idiosyncratic risks will also play a role in bond selection. From a spread basis, MUFG’s macro strategy team is cautious of high yield credit at current levels.