Fixed Income Outlook 3Q 2023: Resilience and Risks (2024)

Risk Consideration

Investments in fixed income securities are subject to the risks associated with debt securities generally, including credit, liquidity, interest rate, prepayment and extension risk. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline in the bond’s price. The value of securities with variable and floating interest rates are generally less sensitive to interest rate changes than securities with fixed interest rates. Variable and floating rate securities may decline in value if interest rates do not move as expected. Conversely, variable and floating rate securities will not generally rise in value if market interest rates decline. Credit risk is the risk that an issuer will default on payments of interest and principal. Credit risk is higher when investing in high yield bonds, also known as junk bonds. Prepayment risk is the risk that the issuer of a security may pay off principal more quickly than originally anticipated. Extension risk is the risk that the issuer of a security may pay off principal more slowly than originally anticipated. All fixed income investments may be worth less than their original cost upon redemption or maturity.

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Economic and market forecasts presented herein reflect a series of assumptions and judgments as of the date of this presentation and are subject to change without notice. These forecasts do not take into account the specific investment objectives, restrictions, tax and financial situation or other needs of any specific client. Actual data will vary and may not be reflected here. These forecasts are subject to high levels of uncertainty that may affect actual performance. Accordingly, these forecasts should be viewed as merely representative of a broad range of possible outcomes. These forecasts are estimated, based on assumptions, and are subject to significant revision and may change materially as economic and market conditions change. Goldman Sachs has no obligation to provide updates or changes to these forecasts. Case studies and examples are for illustrative purposes only.

Investments in fixed-income securities are subject to credit and interest rate risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline in the bond’s price.

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Index Benchmarks

Indices are unmanaged. The figures for the index reflect the reinvestment of all income or dividends, as applicable, but do not reflect the deduction of any fees or expenses which would reduce returns. Investors cannot invest directly in indices.

The indices referenced herein have been selected because they are well known, easily recognized by investors, and reflect those indices that the Investment Manager believes, in part based on industry practice, provide a suitable benchmark against which to evaluate the investment or broader market described herein. The exclusion of “failed” or closed hedge funds may mean that each index overstates the performance of hedge funds generally.

Sector Spread Indexes

US Investment Grade Corporates: ICE BofAML US Corporate Index

US High Yield Corporates: ICE BofAML US Corporate High Yield Index

European Investment Grade Corporates: ICE BofAML Euro Corporate Index

European High Yield Corporates: ICE BofAML Euro High Yield Index

ABS: ICE BofAML US Fixed Rate Asset-Backed Securities Index

MBS: ICE BofAML US Agency Mortgage-Backed Securities Index

CMBS: ICE BofAML US Fixed Rate Commercial Mortgage-Backed Securities Index

EM External Debt: J.P. Morgan, EMBI Global Diversified Face Constrained Index

Abbreviations: US Federal Reserve (Fed), European Central Bank (ECB), Bank of England (BoE), Bank of Japan (BoJ), Swiss National Bank (SNB), Central Bank of Sweden (Riksbank), Reserve Bank of New Zealand (RBNZ), Central Bank of Norway (Norges Bank) Bank of Canada (BoC), Reserve Bank of Australia (RBA), Quantitative Easing (QE), Quantitative Tightening (QT), Pandemic Emergency Purchase Program (PEPP), Consumer price index (CPI), producer price index (PPI), developed markets (DM), emerging markets (EM), Japanese Government Bond (JGB).

326544-OTU-1834050. Date of First Use: July 12, 2023.

I'm an investment professional with extensive knowledge in fixed income securities and risk management. I have hands-on experience in analyzing credit, liquidity, interest rate, prepayment, and extension risks associated with debt securities. My expertise extends to understanding the impact of market conditions on bond prices, especially the inverse relationship with interest rate changes.

Now, let's delve into the concepts mentioned in the provided article:

  1. Risk Consideration:

    • Credit Risk: The risk that an issuer may default on interest and principal payments. It is higher for high yield bonds or junk bonds.
    • Liquidity Risk: The risk of difficulty in selling a security without causing a significant price decline.
    • Interest Rate Risk: Bond prices fluctuate inversely to changes in interest rates. A rise in interest rates can result in a decline in bond prices.
    • Prepayment Risk: The risk that the issuer may pay off principal more quickly than anticipated.
    • Extension Risk: The risk that the issuer may pay off principal more slowly than anticipated.
    • Variable and Floating Rate Securities: Less sensitive to interest rate changes compared to fixed-rate securities.
  2. Disclosures:

    • Information provided is for informational purposes only, not an offer to buy or sell securities.
    • Website links provided are for convenience and not endorsed by Goldman Sachs Asset Management.
    • Reliance on information obtained from sources believed to be reliable, but without guarantee of accuracy or completeness.
    • The material is not financial research or investment advice.
  3. Views and Opinions:

    • Views expressed are for informational purposes and may change.
    • Economic and market forecasts are based on assumptions and subject to change without notice.
    • Past performance does not guarantee future results.
  4. Legal and Regulatory:

    • Prospective investors should be aware of legal requirements and regulations in their respective jurisdictions.
    • Goldman Sachs does not provide legal, tax, or accounting advice.
  5. Geographical Considerations:

    • Various regulatory disclaimers for different regions (e.g., UK, EEA, Switzerland, Asia Pacific, Australia, Canada, Japan, Middle East).
  6. Index Benchmarks and Sector Spread Indexes:

    • Explanation of unmanaged indices and sector-specific benchmarks.

This comprehensive overview provides a detailed understanding of the risks associated with fixed income investments and the considerations investors should keep in mind. It also emphasizes the importance of consulting with financial advisors and staying informed about market conditions.

Fixed Income Outlook 3Q 2023: Resilience and Risks (2024)
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