Published July 2024

PGIM FIXED INCOME THIRD QUARTER 2024 OUTLOOK │ 1

WHATS INSIDE?

Total Returns (%)

Select a section to jump ahead.

1
2

KEY CONVICTIONS & INVESTMENT THEMESBOND MARKET OUTLOOK

3
5
12

Individual FI Sectors

Q2
‘24

YTD
‘24

2023

2022

2021

European Leveraged Loans

2.39

4.98 13.53

-3.36

4.87

U.S. Leveraged Loans

1.86

4.44 13.04

-1.06

5.40

European IG Corporate

1.49

3.85

8.19 -13.65-0.97

European High Yield Bonds

1.39

3.23 12.78 -11.13

3.32

U.S. High Yield Bonds

1.09

2.58 13.45 -11.19

5.36

CMBS

0.67

1.53

5.42 -10.91-0.64

EM Local (Hedged)

0.54

0.74

7.60

-8.85

-5.52

EM Debt Hard Currency

0.30

2.34 11.09 -17.78-1.80

U.S. Treasuries

0.10

-0.86

4.05 -12.46-2.32

Mortgage-Backed (Agency)

0.07

-0.98

5.05 -11.81-1.04

Municipal Bonds

-0.02

-0.40

6.40

-8.53

1.52

U.S. IG Corporate Bonds

-0.09

-0.49

8.52 -15.76-1.04

EM Currencies

-0.27

-1.38

8.44

-7.14

-3.09

3

GLOBAL MACROECONOMIC OUTLOOK

4

GLOBAL SECTOR OUTLOOKS

17

Developed Market Rates

18

Agency MBS

20

ESG Highlight: Ingrained Income Bias in Sovereign ESG Ratings

21

U.S. Long IG Corporates-1.74-3.39 10.93 -25.62-4.65

Securitized Credit

23

Long U.S. Treasuries

-1.81

-5.01

3.06 -29.26-1.13

Investment Grade Corporate Bonds

25

Global Agg. Hedged

0.12

0.13

7.15 -11.22-0.15

Global Leveraged Finance

27

U.S. Aggregate

0.07

-0.71

5.53 -13.01-1.39

Emerging Market Debt

29Euro Aggregate (Unhedged)

-0.88

-1.21

7.19 -17.18-4.71

Global Agg. (Unhedged)

-1.12

-3.16

5.72 -16.25-1.54

Municipal Bonds

33

Yen Aggregate

-2.77

-3.14

0.51

-5.30

-2.85

S&P 500 Index

4.28

15.23

26.29 -18.11

28.71

SOFR

1.35

2.72

5.18

1.66

0.03

U.S. Dollar (DXY Index)

1.26

4.47

-2.11

8.21

6.37

Multi-Sector

Other Sectors

5

SUMMARIES

34

Summary of Outlooks and Asset Class Views

35

Summary of Geopolitical Outlooks

36

Summary of Market Performance

37

PGIM FIXEDFIXED INCOME
INCOME THIRD
THIRD QUARTERQUARTER 2024
2024 OUTLOOKOUTLOOK │
│ 22
PGIM

Past performance is not a guarantee or a reliable indicator of future
results. See Notice for important disclosures and full index names. All
investments involve risk, including possible loss of capital. Sources:
Bloomberg except EMD (J.P. Morgan), HY (ICE BofA), Bank Loans(Credit Suisse). European returns are unhedged in euros unlessindicated. Performance is for representative indices as of June 30, 2024.
An investment cannot be made directly in an index.

SECTION 1

KEY CONVICTIONS &INVESTMENT THEMESPGIM FIXED INCOME THIRD QUARTER 2024 OUTLOOK │ 3

KEY CONVICTIONS & INVESTMENT THEMES

1Of Political Upheaval and Rising Deficits...This year’s global political developments not only add
to future geopolitical uncertainty, but they also threaten to increase the fiscal risks already prevalent in
the post-COVID environment. And elevated interest rates only aggravate the fiscal arithmetic. As aresult, sovereigns yield curves for countries with high debt burdens and large deficits—such as the
U.S., Japan, Italy, and France—may be intermittently subject to upward pressure on long rates.

2…the Mode of Moderation…One aspect of the global economy’s emergence from the post-COVID
boil is the return of some “traditional” market constructs—inflation that is approaching targets,interest rates that are sitting near more historically normal levels, and newfound room for central banks
to ease policy. The forces behind these constructs bolster our “moderation” base case for the global
economy over the coming 12 months.

3…Yield Stability and the Strategic Case for Bonds…Our ongoing expectation for range boundrates may feel pedestrian, but it’s a key component of the strategic, asset-allocation case for bonds.
Indeed, the relative-value shift over the last few years—i.e., the cheapening of bonds vs. stocks—has
typically positioned bonds for compelling risk-adjusted returns. Furthermore, if stocks experience a
sharp correction while the Fed is on hold or cutting rates, bonds historically act as solid portfolio
shock absorbers.

4…and a High-Quality, Opportunistic Emphasis. At this stage in the credit cycle, more frequent
event risks, consumers’ increasing focus on essentials, and moderating credit metrics (along withincreased distressed exchanges), point our allocations towards high-quality securities. That said, we’reseeking to add risk in situations where dislocations may mean revert and/or where sector dispersion
reveals relative-value opportunities.

PGIM FIXED INCOME THIRD QUARTER 2024 OUTLOOK │ 4

SECTION 2

BOND MARKETOUTLOOK
By Robert Tipp, CFA, Chief Investment Strategist & Head of Global Bonds

PGIM FIXED INCOME THIRD QUARTER 2024 OUTLOOK │ 5

BOND MARKET OUTLOOKMarkets’ Consolidation
Belies Fiscal Concerns

Figure 1
The “High Plains Drifter” Stealth Bull Market Continues (total return %)135130This year has been a roller-coaster for the bondmarket as alternating waves of pessimism andoptimism mirrored the wide swings in economic
data. As doubts about the economic trajectory
swirled—especially the inflation outlook—sowent interest rates: up early in the year along with
the inflation readings, then following inflation
lower as the first half progressed.
With little net change in yields, returns on highquality fixed income paused in the first half.
However, higher yielding sectors, such as highyield corporates and hard currency emerging
markets debt, continued to post positive returns,
albeit at a slower pace than in 2023 (Fig. 1).

An environment of high and stable long-term
rates supports the bull case for fixed income.
For those seeking a quick drop in yields, this will
be a disappointing market. Even with thelikelihood of rate cuts, long-term yields should
remain centered around current levels as: 1. afair amount of rate cuts are already priced in;and 2. loose fiscal policy—and its resulting
heavy government bond issuance—may impede
any substantial, sustained decline in long rates.
On net, this will likely result in a slow
normalization (i.e., dis-inversion) of the yield
curve with the

125
120
115
110
105
100

Q1

95
June 2022

December 2022
U.S. Agg.

Global Agg.

U.S. Corp.

December 2023
U.S. Corp. HY

June 2024

EM HY (HC)

Source: Bloomberg

Figure 2
Fixed income risk-adjusted returns have historically been favorable when bond yields are higher than equity earnings yields.
Sharpe ratios
0.8

When bond yields exceed
earnings yields, Treasuries
and IG corps. historicallyoutperform stocks by awide margin.

0.6
0.4

S&P 500 earnings yield (%)

16
12
8
4

0.2
0.0
Earnings yield>Bond yield Bond yield > Earnings yield
Stocks

IG corporates

Treasuries

PGIM Fixed Income, Bloomberg, Haver Analytics
PGIM FIXED INCOME THIRD QUARTER 2024 OUTLOOK │ 6June 2023

Q2

0
0

5

Data (1970-Present)

10

Current

15

BOND MARKET OUTLOOK

outcome being little change in the range for long rates,
despite any drop in short rates (see the following box
on fiscal considerations).

The Appeal is in its Strategic Value
Granted, a range bound rate backdrop may seem likean uninteresting opening volley for a “bullish thesis forbonds.” But this stability provides context to a few
strategic points as events unfold in the second half ofthe year and beyond. First, the value of bonds from anasset allocation perspective—highlighted in “The Casefor Rebalancing into Bonds, in Pictures”—is not to beunderestimated given the shifts in valuations and thecurrent point in the economic cycle. For example, if
history is any guide, the shift in relative value over thelast few years—particularly the cheapening of bonds
versus stocks—has typically positioned bonds forcompetitive risk-adjusted returns (Fig. 2).

Hazy Summer

Second, the defensive characteristics of bonds at thispoint in the cycle are striking. If stocks experience a
sharp correction while the Fed is on hold or cutting
rates, bonds historically perform as solid shock
absorbers in investors’ portfolios (Fig. 3).

As positive as we are about the long-term outlook forbonds—as well as the opportunity to add value inthese volatile times—the short term is a much tougher
call. Although we expect relatively stable rates over thelong term, the summer is notorious for lower liquidity
and outsized reactions to shocks, of which any number
are possible: Eurozone or U.S. debt concerns and/or
rising geopolitical risks in the Mideast, South China
Sea, or even in the Western hemisphere as Russia
increases its military presence. We’ll remain on thelookout for both risks and opportunities as the season
progresses—starting with France (see the following
box).

Our guardedly positive, long-term view for the credit
sectors is another positive for market returns: theoutlook for positive excess returns from credit—albeit
at a less fevered pitch given the level of spreads—
remains favorable thanks to positive fundamentals,
issuer restraint, and a benign technical backdrop as
investors move into fixed income to lock in higher
returns at the peak of the interest-rate cycle.

Figure 3
Cash vs. Bonds during quarters when equities declined by at least 5% (1962-Present)
Average return (%)

Returns based on Fed regime (%)

4.0

HikingHold

Cutting

Cash (%)

1.3

0.7

1.5

-4.0

Bonds (%)

-1.2

4.6

4.0

-8.0

Stocks (%)

-7.9

-12.5

-14.9

# of episodes

15

10

14

0.0

-12.0
Cash

10-year Treasury note

Source: PGIM Fixed Income and Haver Analytics

PGIM FIXED INCOME THIRD QUARTER 2024 OUTLOOK │ 7

StocksBOND MARKET OUTLOOKSPOTLIGHT: FRANCE’S FISCAL LITMUS TEST
While it’s too early to speculate on the degree offiscal loosening that may follow the U.S. elections,
recent events in France gave us a glimpse of whenpolitical upheaval threatens to loosen already loose
fiscal policy.
While European credit spreads have widened since
the call for snap elections, the widening in Frenchsovereign and quasi-governmental credit spreads
were the most significant proportionally, more sothan Italian debt or European corporate spreads
more broadly (Fig. 4). As the trajectory of thepolitics and policy wavers over the coming weeks,
the potential for investor anxiety and market
volatility in the European credit markets will be
impossible to handicap. Nonetheless, longer term,
we are guardedly optimistic that spreads on
corporate and sovereign issuers, such as Italy andFrance, will not spiral out of control and will instead

Figure 4
The main impact of France’s snap elections
materialized in French governments, which, on a
proportionate basis, widened much more than
Italian governments as well as European investment
grade and high yield corporates (indexed to 100).

end up around current levels or tighter. Why?

overtures necessary for activating the TPI.

First, in contrast to the pre-2012 world, theEurozone now has the collective political leverageand self-interest to enforce its fiscal rules on member
countries. Furthermore, the ECB has developed thetools—such as the Transmission Protection
Instrument—to stem market jitters in the bondmarkets caused by “unwarranted” external
developments.

Furthermore, the ECB is seeking to keep monetary
policy stable or somewhat easier. Therefore, any
substantial increase in French and / or peripheral
yields would interfere with transmission of theintended monetary policy and could theoretically be
countered by ECB purchases under the TPI.

In order to qualify for ECB purchases under the
TPI, the French government needs to take butmodest steps in terms of fiscal tightening—0.5% of
GDP per year in structural terms for a seven-year
adjustment plan, or about 1% of GDP per year in
the case of a four-year adjustment plan. Of course,
this flies in the face of the policies being pitched, allof which risk pushing the budget deficit wider.
However, the more unsettled the markets become,the more pressure it will apply on politicians to makethe required budget adjustments and politicalYet, France can not qualify for the TPI until agovernment is formed, an adjustment program incompliance with the EC's guidance is agreed upon,
and the government sufficiently demonstrates thatthe adjustment program is underway. Under normal
conditions, it could take France well over six months
to comply for TPI eligibility. However, an exigent
and unwarranted increase in yields could galvanize
politicians to decisively take the required steps toaccelerate the timeframe to get France into the TPI
implementation stage.

145
135
125
115

105
95
85
75

Source: Bloomberg
PGIM FIXED INCOME THIRD QUARTER 2024 OUTLOOK │ 8

65
07/2023

09/2023
France 10y - Germany 10y

11/2023

01/2024

Italy 10y - Germany 10y03/2024
Euro IG Corps.

05/2024
Markit iTraxx Europe

BOND MARKET OUTLOOK

Bottom Line: When looking through quarter-to-quarter
fluctuations, the strategic case for bonds remains strong.
In our base case, the stealth bull market continues—one
not generated by a drop in rates, but simply by theaccumulation of yield itself. Meanwhile, we continue to
see opportunities to add value in a volatile market. And,
from an asset allocation perspective, the case for bonds issolid given their current relative valuations as well as theirpotential to act as a shock absorbers at this point in themarket cycle.

SPOTLIGHT: LOOSE FISCAL POLICY AND RISING
GOVERNMENT INDEBTEDNESS: AN INTERMITTENTSHORT-TERM MARKET DRIVER WITH PERNICIOUS
LONG-TERM EFFECTS.
Every once in a while—but lately with increasing
frequency as observed in 2022 when a UK budget
proposal sent the Gilt market into a tailspin—
investors’ attention turns to loose fiscal policy andrising levels of indebtedness.

We also delineate between our short-term and long-term
views. Indeed, political, economic, and geopolitical risks
continue to obscure the short-term outlook, perhaps
portending an anxious summer. Longer term, the outlook
for fixed income as an asset class looks strong on an
absolute and relative basis with ample opportunities to
add value through sector rotation and issue selection involatile markets.

Figure 5
The current debt levels in the U.S. and France werepreviously reserved for the most heavily indebted
countries, such as Greece and Italy. Not to be
outdone, the debt levels for the latter countries are
now a full step higher than their prior levels (debt-toGDP)
GermanyEuro zone government

Italy

GreeceU.S. government

FranceSource: Bloomberg
PGIM FIXED INCOME THIRD QUARTER 2024 OUTLOOK │ 9When investors are optimistic about disinflation andrate cuts, they don’t seem to worry about debt
burdens, deficits, and government bond issuance.
But the fact of the matter is that debt burdens forcountries like the U.S. and France are adding up as
bouts of stimulus for crises, such as the GFC and
COVID, get piled on top of what are alreadyperennially high deficits.

The net result: the debt burdens of the U.S. andFrance are up at the same concerning levels
occupied by Italy and Greece in 2006. Meanwhile,
Italian and Greek debt levels have surged a full
realm higher (Fig. 5). In other words, the 90%+highly indebted zone has gone from a rarity among
DM countries to more of a norm. The impact ofthese higher debt burdens is twofold. One, it leaves
markets vulnerable to bouts of volatility, with the
French snap election of recent weeks providing astriking example of a yield surge triggered by fiscal
concerns.

200

160

120

80

40
1996

1999

2002

2005

2008

2011

2014

2017

2020

2023

Second, and perhaps more important, is the fact thathigher debt burdens lead to a chronic increase in the
average, long-term cost of a government’s debt
service. Last August’s U.S. Treasury refunding
announcement of a surprisingly large issuanceschedule delivered both a boost in market volatility
and a significant and rapid rise in Treasury yields
from sub 4% to nearly 5% by the end of September.

relative to swaps along with the increase in thegovernment’s level of indebtedness. In contrast to
the turn of the century, when Treasury yields were
nearly 1.5% lower than swap yields at the 30-year
point of the curve, at present, the yield on US
Treasuries is roughly 0.75% higher than thecorresponding yield on swaps (Fig. 6). In otherwords, as the government swung from a situation

The long-term increase in debt-service costs
resulting from heavy issuance can be seen in the
progression of higher government yields relative tosupply-neutral benchmarks, such as swap rates—i.e.,the swap spread.

of surplus and paying down the debt to one ofyawning deficits and a strikingly high debt-to-GDP
ratio, the Treasury’s cost of issuance has risen by
roughly 2% relative to a supply neutral benchmark.1

Over the last few decades, Treasury yields have risen

Government indebtedness can cut both ways in theEurozone. For example, thanks to Germany’s

Figure 6
U.S. swap spreads tend to widen in periods when the deficit deepens, necessitating
increased Treasury issuance (lhs, bps; rhs, ratio).

3.75

110

3.25

-50

90

2.75

-100

70

2.25

50

1.75
07/2023

0

-150
1994

1998
U.S. 30y Swap

2002

2006

2010

U.S. Debt-to-GDP (rhs)

Source: Bloomberg
PGIM FIXED INCOME THIRD QUARTER 2024 OUTLOOK │ 10

2014

2018

2022

Our parting takeaway is that government
indebtedness is increasingly becoming a market
driver in the post-COVID environment.
Government yields versus swaps will continue to be
profoundly impacted by debt trajectories, creating
both risks and opportunities for credit investors.
1 Around ¼% of the shift in yields is the result of shifting theswap spread calculation from LIBOR to SOFR.

Figure 7
German bund yields continue to trade inside of swaps, while France continues totrade wide (%).
13050

relatively low debt levels, the country’s bunds tradeat lower yields than swaps. Meanwhile, heavilyindebted credits, such as France and Italy—
analogous to the U.S.—have to pay yields above
swap rates due to their higher levels of indebtedness(Fig. 7).

09/2023

Euro 10y Swap
Source: Bloomberg

11/2023

01/2024

France 10y Yield

03/2024

05/2024

Germany 10y Yield

LOOKING FOR
MORE INSIGHTS?
Check out more of PGIM Fixed Income’s latest thought
leadership and media spotlights at www.PGIMFixedIncome.com

BLOG POST

PODCASTTHE CASE FOR REBALANCING INTO BONDS,
IN PICTURES

THE BUSINESS OF BONDS WITH PGIM FIXEDINCOME’S CO-CIO

With yields up at levels not seen in more than a decade,bonds are definitely catching the eye of investors. In thecurrent market environment, we see a compelling casefor rebalancing into bonds vs. both stock and cash.

Bonds are back and with fixed income gaining interest
with investors, we’re taking an introspective look at ourinvestment process and how we’re navigating current
market dynamics here at PGIM Fixed Income.

PGIM FIXED INCOME THIRD QUARTER 2024 OUTLOOK │ 11

WHITE PAPER

FIVE OVER FIVE-THE STRUCTURAL SHIFTSTAKING PLACE IN EM
Prior to the onset of COVID-19, much had been
written about the appeal of emerging market debt
(EMD), touting the yield advantage as well as its
lower correlation to other fixed income asset
classes.

SECTION 3

GLOBAL
MACROECONOMICOUTLOOK
By the Global Macroeconomic Research TeamPGIM FIXED INCOME THIRD QUARTER 2024 OUTLOOK │ 12

GLOBAL MACROECONOMIC OUTLOOKResiliency on the Surface, Crosscurrents Beneath
If investors were asked to describe the global
economy in the first half of 2024, many might refer
to its continued resiliency, particularly amidst theelevated tail risks that have accompanied the postCOVID expansion. Although these risks may bedisconcerting at times, they have yet to derail
steady global economic growth.
Indeed, our “moderation” base cases in the U.S.,
Europe, China, and the emerging markets over the
coming 12 months are similar in their expectations
for continued growth, supported by presumptive
central bank rate cuts and general acceptance ofongoing fiscal largesse. Meanwhile, thecrosscurrents of political upheaval, renewed signsof debt sustainability concerns, China’s uncertain
path forward, and ongoing geopolitical strife swirl

Figure 1
Global budget deficits set to extend well beyond
the COVID years (government primary balances,% of GDP)

Source: Macrobond
PGIM FIXED INCOME THIRD QUARTER 2024 OUTLOOK │ 13

below the surface, leading to a second half that
could waver between periods of volatility in either
direction, but without the weight or durability toderail the established expansion.
All Politics is Local, Ramifications can be Global
Europe’s political shift—with far-right parties
gaining momentum in recent parliamentaryelections in core countries relative to theperiphery—carries two broad implications: first,
the EU’s improved cohesion since COVID
indicates that advocating for reforms will likely
come from within, as opposed to pushing forchange by threatening to exit the bloc.
Second, while the results have country-specificramifications, e.g., potential calls for Flemmish

independence in Belgium, the results not only
sparked the country’s snap elections, but they also
showed how quickly and unexpectedly debtsustainability concerns can resurface (see the DM
rates section for more on the reaction ofEuropean rates).
Similarities surfaced globally in the first half of2024. For example, Mexico’s new Sheinbaum
administration may seek constitutional reforms
that could materially deepen its deficit and/or
affect its business climate. Hence, it’s possible thatdebt sustainability concerns won’t be isolated to a
specific region or country given the broad increasein global debt levels (Fig. 1), underscoring theneed for country-specific analysis on topics
ranging from immigration to monetary policy.

GLOBAL MACROECONOMIC OUTLOOKAt this point, the campaigning leading up to the
U.S. elections in November is creating morequestions than answers considering the first
uneven presidential debate, the party conventions
set for later this summer, and the forthcoming
policy analysis. A couple top-of-mind questions
that we’re weighing include whether geopoliticalconditions become more fraught leading up to an
inauguration and how the next administration
might approach situations in Europe and the
Middle East.

A Dual-Sustainability Front
The concern that accompanied theannouncement of snap elections in France wasreminiscent of the UK’s mini-budget debacle in2022, and attention could turn to Italy thisAutumn amidst a convergence of events that
could test the market appetite for Italiansovereign debt. That said, Europe is managing its
latest uncertainty with an expanded set of tools
relative to those at its disposal during earlier,volatile periods (e.g., Greece in 2015).

Several European countries, including France,
Italy, and Belgium, within the European
Commission’s Excessive Deficit Procedure(EDP) may benefit from a greater emphasis on
flexibility over austerity in terms of returning
deficits to the prescribed 3% threshold over thenear term. The ECB’s Transmission Protection
Instrument is another tool—albeit an untested
one with vague details—that could be beneficial
as it can be used in scenarios where a country’s
yields climb due to events out of its control (seePGIM FIXED INCOME THIRD QUARTER 2024 OUTLOOK │ 14

the preceding Market Outlook section for moreon these tools).

Figure 2
Performance flip as peripheral GDP growth pulls ahead ofEurope’s core (core vs. periphery quarterly GDP growth, %)The list of countries joining the EDP is also
telling. With Italy as an exception and incontrast to pre-COVID conditions, economic
growth in the periphery, e.g., Spain and Greece,
is now outperforming the core, e.g., France andGermany (Fig. 2). Sovereign yields tell a similarstory with Greek 10-year yields below thosefrom Italy and Portuguese 10-year yields below
those from Spain.
The other aspect of sustainability pertains to theUnited States’ economic outperformance, which
has been partially driven by a significant fiscal
impulse. Hence, the U.S. fiscal picture also
continues to deteriorate, yet is meeting little
resistance from either political party orpresidential candidate, raising questions ofwhether it might eventually meet some market
resistance. The sustainability of the U.S.
expansion relative to other DM economies
could also face pressure if immigration—which
added significant numbers to the labor force inrecent years—is affected going forward.

Periphery > Core

Core > Periphery

Precedent for Policy Divergence

Our introductory reference to resiliency also
pertains to inflation. Following a sharp decline
over 2023, European headline inflation looks tohave stalled just above target since the start of
the year. That said, near-term inflation trends
and weak domestic demand provide additional
confidence in the likely rate cuts to come.
Source: Macrobond

GLOBAL MACROECONOMIC OUTLOOKThe ECB kept its options open regarding thetiming of future policy decisions following its
June rate cut—putting it ahead of the Fed’s
easing cycle—and we continue to expect two
more cuts in 2024, bringing the policy rate
down to 3.25% by year end. Ceteris paribus, we
expect future ECB rate cuts will be shallower
and will end at a higher terminal rate than prioreasing cycles.
With UK inflation expected to pick up slightly
through the remainder of the year, the BoE’s
decision to hold its policy rate at 5.25% in June
was described as “finely balanced.” Ultimately,
three more policy committee members need tovote for a cut in August for the BoE to begin
its easing cycle, adding emphasis to members’comments leading up to the next meeting. And
Labour’s general election victories resulted inlimited movement across the Gilts complex
thus far.
While base effects may keep U.S. inflation in
the area of 2.5% in the months ahead, the Fed
may go to notable lengths to explain why thatdynamic shouldn’t prevent it from cutting rates.
Hence, we expect at least one 25 bps cut in
2024 with mid-December appearing as themost likely meeting for that decision. That said,
following the more moderate June payroll
report, we think the Fed could signal its rate
cutting intentions relatively soon and potentially
implement another cut in the second half of2024 if given the opportunity. If the Fed ishindered from cutting rates this year, it could
shift those cuts into 2025, and we see a total of
PGIM FIXED INCOME THIRD QUARTER 2024 OUTLOOK │ 15

150 bps in Fed rate cuts through next year,
which is one more than the Fed’s guidance inJune.
The implications of the ECB and BoE easing
policy ahead of the Federal Reserve has
generated some concerns about the effects ofpolicy divergence. However, given the recent
historical precedence, this particular separation
appears manageable for now. Yet, policy
divergence may continue to weigh on the Bankof Japan and the yen, which has experienced
consistent pressure since the BoJ’s rate hikethat lifted its policy rate out of negative territory(Fig 3). Although the BoJ was expected topursue a gradual pace to policy tightening, thepressure on the currency—as well as the risksof an inflation pass through—may prompt a
more rapid approach with the potential for
multiple rate hikes per year and quantitative
tightening that could start in the second half of2024.

Figure 3
Despite historical precedence for policy divergence (central bankpolicy rates, %)…

ECB hikes
while Fed is
cutting

ECB easing
while Fed istightening..it can still place pressure on certain markets, such as JPY/USD
WeakerJPY

China’s Path Unlikely to Propel the Global
EconomyThose awaiting an economic revival in Chinathat is strong enough to assume leadership in
global economic growth may have a longer waitin store. Authorities in China have taken a
gradual stimulus approach following thecountry’s real estate correction, cognizant thatswift, sizable action could promote CNY
depreciation as well as overcapacity issues.

Less cuts
pricedSource: Macrobond

BoJ
InterventionGLOBAL MACROECONOMIC OUTLOOK

However, the gradual pace of stimulus could
continue, particularly in light of China’s recent andrare, long-term Treasury bond offering with anacceleration in local bond offerings targeted atmaintaining “the necessary intensity of fiscal
expenditure.”
Moderation is the Mode
Despite China’s gradual stimulus, our base case of“moderation” for the world’s second largest
economy remains the highest of the major regions
at 75%, up from 70% to start Q2. The
government’s steady support for the real estate
sector should reduce its drag on growth, withsentiment slowly recovering. Authorities will also
continue to manage the currency to prevent
excessive weakness and volatility. Nevertheless,risks are biased to the downside given the multiple

Figure 4
Changes to our regional base cases,
complementary scenarios, and their probabilities(%)

Source: PGIM Fixed Income
PGIM
PGIMFIXEDFIXEDINCOME
INCOMETHIRD
THIRDQUARTERSECONDQUARTERQUARTER
2024
2024
2024
OUTLOOKOUTLOOKOUTLOOK
││16
│
16 16

policy challenges and constraints as well as ahistorically slow exit from slowdowns caused bybalance-sheet challenges.
Our base case for the Euro Area shifts from“weakflation” to moderation with a 40%
probability, up from 25% in Q2. The 15
percentage point increase came at the cost of ourweakflation, stagflation, and recession scenarios.
Our base case sees economic momentum building
towards potential, supported by falling inflation
and rising real incomes. Lower energy prices
should also provide a boost to householdspending.

U.S. base case assumes solid growth in the 2.0%
range with PCE inflation converging towards theFed’s 2% target. Household consumption remains
steady enough to drive growth even as the labormarket gradually loosens.

With the three regions above comprising about athird of the weighting for emerging markets, ourEM base case also calls for moderation (~50%),
followed by equal weightings for recession andweakflation (~20% each).

In the U.S., our base case also changed from“weakflation” to moderation (from 25% in Q2 to35%, with the 10 percentage points coming fromthe weakflation and roaring ‘20s scenarios). Our

U.S.

EuropeChina

EM

Scenario

Q2

Q3

Q2

Q3

Q2

Q3

Q2

Q3

Moderation

25

35

25

40

70

75

39

49

Weakflation

30

25

40

30

--

--

25

19

NGDP Boom

15

15

5

5

5

5

9

10

Roaring 20s

10

5

--

5

5

5

5

3

Recession

20

20

25

20

20

15

24

19

Stagflation

--

--

5

--

--

--

--

--

SECTION 4

GLOBAL SECTOROUTLOOKSPGIM FIXED INCOME THIRD QUARTER 2024 OUTLOOK │ 17

GLOBAL SECTOR OUTLOOKSDEVELOPED MARKET RATESOutlook: Maintaining a tactical approach as fiscalrelated concerns linger and yield curves show signs of
re-steepening. Market dynamics may continue to shift
as rate differentials apply pressure to certain regions.
◼ From a quarter-over-quarter perspective, many

developed market rate complexes started Q3 in thesame nominal vicinity where they started the priorquarter. Yet, the minor, net changes belie a seriesof notable late-quarter developments with thepotential to extend through the second half of theyear and beyond.
◼ A common thread throughout our economic

and market outlooks pertain to the conspicuouslack of fiscal restraint. As events in late Q2 played
out—including the U.S. presidential debate—DM

The steepening along the U.S. 2y-30y
yield curve (%).

yield curves started to re-steepen from the backend. The steepening stood in contrast to typical,
quarter-end buying patterns. While theaccompanying chart shows a slight shift along the
U.S. curve (2-year to 30-year curve shown forclarity), if present conditions hold, the curve “disinversion” may continue amid deficit-related anddebt-sustainability concerns.

◼ Another, late-quarter trading development◼ The steepening is also indicative of cash

◼ Prior to the announcement of the snap elections,securities underperforming derivatives, thus leading
to wider swap spreads in the U.S. and Europe aswell as pricing implications for credit products thatare priced off of swaps. Meanwhile, long-awaited
central bank rate cuts may add further momentum
to the front end of the curve steepening.

the spread of 10-year French OATS to 10-year
German Bunds stood at about 45 bps, and it
subsequently widened to about 80 bps. While thatspread compressed into ~65 bps prior to thesecond round of voting, elevated international
ownership of French Treasuries at about 60%
remains a source of vulnerability.

appeared to be driven by declining balance sheet
capacity as the general tightening in monetary
policies takes hold. Indeed, as the French 10-yearyield jumped and the 10-year bund yield declined,
the widening spread may have forced some entities
to unwind trades, thus adding to the wideningpressure, due to balance sheet constraints.

4.7

4.5

4.3
2Y
Source: Bloomberg
PGIM FIXED INCOME THIRD QUARTER 2024 OUTLOOK │ 18

3Y

U.S. Treasury Yield Curve 7.1.2024

5Y

7Y

10Y

U.S. Treasury Yield Curve 4.1.24

20Y

30Y

GLOBAL SECTOR OUTLOOKS | DEVELOPED MARKET RATES◼ Although ECB rate cuts—we expect two◼ Shifting to U.S. monetary policy, if the Fed can

additional 25 bps cuts to a policy rate of 3.25% by
year end—and the central banks’ Transmission
Protection Instrument are regarded as potential
sources of support, comments by ECB President
Lagarde late in Q2 also emphasized adherence tofiscal frameworks. That may indicate ECB
tolerance for spread widening that is driven by
fundamentals, rather than existential
developments.

convey the message that inflation in the 2.5-2.6%
area remains above-target due to year-over-yearcomparisons, we expect at least one Fed cut in
2024 with the mid-December appearing as themost likely meeting for that decision. That said,
we think the Fed could implement another cut inthe second half of 2024 if given the opportunity.
In all, we see 150 bps of Fed rate cuts through2025.

◼ Recent developments in Japanese markets may

also garner attention going forward. While the
BoJ may prefer to slowly lift rates to ensure that
2% inflation is sustainable, the rate differentialthat it is operating under is applying consistentpressure on the yen and raising import costs. It’sa situation that may prompt the BoJ to accelerate
its rate hikes—perhaps to a pace of two hikes ayear—and to pull the start of its quantitative
tightening process forward to the second half of2024.
◼ Intervention efforts to stabilize the yen are

estimated at about $60 billion thus far, which is asize that also carries market implications. Given
that Treasuries may be sold to raise cash used tosell dollars and buy yen, that dynamic may also
contribute to some selling pressure on cash
securities at the front of the curve.

PGIM FIXED INCOME THIRD QUARTER 2024 OUTLOOK │ 19

GLOBAL SECTOR OUTLOOKSAGENCY MBS
Outlook: Positive in the short-term given current
valuations, limited supply, and potential domestic bankdemand. We prefer underweights to production coupons(6% issues and up) as the convexity profile continues toworsen.
◼ Our positive outlook on the MBS sector is due toaffordable housing remains a headwind for mortgage
application activity. Year-to-date MBS net supply
remains light at less than $60 billion. However,seasonal origination activity is in full swing, withbonds with loan age showing better prepayment
speeds.

a combination of factors, including current
valuations, limited supply, and potential domesticbank demand as we move forward. From a generalperspective, MBS would benefit if the Fed ultimately
cuts rates before year-end and from further declines
in implied volatility.

◼ On the demand side, buying from banks could◼ From a technical perspective, although mortgage

on MBS durations, but that has recently improved.
Looking ahead, most coupons in the MBS Index

rates have fallen from local highs, the lack of

MBS issuance has remained light asmortgage rates remain near local highs.
Convexity risk is building in production
coupons amid rate cut expectations (30-year
fixed rate mortgage rate, %)increase if deposit pressures ease amid the rate
cutting cycle. The Federal Reserve has also indicated
final Basel 3 capital rules will be far less restrictive
than originally proposed.
◼ The recent Treasury selloff led to some pressure

should behave more in line with expectations at theserate levels.
◼ The potential risks to our outlook also pertain to

the Fed, particularly if it doesn’t deliver the policy
easing anticipated by markets. Furthermore, if the
Fed adjusts its quantitative tightening initiative, it’sunlikely to stop MBS from rolling off the balance
sheet, and it’s also unlikely to add them again in the
instance of another quantitative easing program.
Finally, expectations of rate cuts have also limited theopportunity set in the sector as convexity risk
continues building in production coupons, narrowing
investment choices to more positively convex
opportunities down in the coupon stack.

8.00
7.00
6.00

5.00
4.00
3.00

Source: Bloomberg

PGIM FIXED INCOME THIRD QUARTER 2024 OUTLOOK │ 20

2.00
2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

GLOBAL SECTOR OUTLOOKS | ESG HIGHLIGHT

Biofuel Producers: Pockets of Opportunity in Brazil
Global biofuel demand is set to expand by 38 billion
liters over 2023-2028, according to the IEA, a near
30% increase from the previous five-year period. In
fact, total biofuel demand rises 23% to 200 billion
liters by 2028 under the IEA’s main case, withbiodiesel and ethanol accounting for more than two
thirds of this growth.1 This demand is largely
expected to be driven by robust global biofuel
standards, particularly in emerging economies, like
Brazil, Indonesia, and India, where car usage andfuel demand is increasing alongside development.
Though biofuel producers generally remain attractive
given expected demand, there are particularlycompelling pockets of investment opportunities forcorn-based ethanol producers in Brazil. Unlike
sugarcane ethanol producers, corn ethanol producers
generally do not grow their own feedstock; instead,they procure it from a third party. A key benefit to

Global biofuel demand, historical, main
and accelerated case, 2016-2028(lhs: billion litres per year; rhs: %)this is the avoidance of significant capex costs
associated with owning and maintaining the landnecessary to grow corn and other feedstocks.

basis due to these offsetting revenues.
Booming Brazilian biofuel production
From 1973 to 2022, the share of bioenergy used in
Brazil’s transport sector increased from just under
1% to nearly 21%.4 Most of these gains have been
within the last two decades, a time during which theBrazilian government began pushing for the
introduction of flex fuel vehicles (FFVs) that can run
on a variety of biofuel blend ratios. The governmentof Brazil also advocated for the expansion of a fueldistribution infrastructure capable of supplying

Ethanol production in the country has historicallycome from sugarcane, but this has evolved in recent
years. Corn ethanol production in Brazil jumped
from 40 million liters in 2014 to 4.4 billion liters in
2023, and production is expected to increase evenfurther: corn-based ethanol is projected to represent
34% of total ethanol production by 2032, up from
23% today.2, 3
Additionally, many corn ethanol producers benefit
from supplementary revenue streams from the saleof animal nutrition products. These are valuable,
protein-rich byproducts of the ethanol refining
process that can be sold to offset the costs associatedwith ethanol production. As a result, corn ethanol
can be more cost efficient to produce on a net cost

1 IEA, “Transport biofuels – Renewables 2023”
2 Based on public disclosure from four large Brazilian biofuel

producers.
3 Farmdoc Daily, “Brazil Emerges as Corn-Ethanol Producer

with Expansion of Second Crop Corn,” June 30, 2023.
4 Brazil: Biofuels Annual | USDA Foreign Agricultural Service

5 This type of fuel is most commonly known as E27.
6 USDA “Biofuels Annual,” September 5, 2023.

300

7

250

6
5

200
 Ethanol (lhs)  Biodiesel (lhs) Renewable diesel (lhs)  Biojet fuel (lhs)
Main case share (rhs)

Accelerated case share (rhs)

4

150

3

100

2

50

1

0

0
1

Source: IEA
PGIM FIXED INCOME THIRD QUARTER 2024 OUTLOOK │ 21

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

GLOBAL SECTOR OUTLOOKS | ESG HIGHLIGHT

a gasoline-ethanol blend and pure ethanol at
petrol stations, giving drivers the ability to decide
which fuel to buy based on the price differential.
Then, the government of Brazil began stimulating
the production of ethanol and biodiesel throughfuel blending mandates, with the dual objectivesof enabling the country to grow its lucrative
domestic biofuels industry and ensure its energy
security. Current standards in Brazil require a
27% blend of ethanol in all gasoline.5 The
country’s Ministry of Mines and Energy has
begun discussions to raise this mandate evenfurther to 30%.6

Brazil also mandates a blend of biodiesel into
diesel of 14%, and a new proposal approved in
March 2024 by the Brazilian Chamber of
Deputies would see this threshold rise to 15% in
2025.7 Playing a key role in igniting Brazil’s

biofuel production, these are among the mostambitious biofuel standards in the world.

prioritization of RenovaBio will continue tobenefit biofuel producers.

Brazil’s net zero ambition also provides tailwinds
for biofuel producers

RenovaBio is based on three key instruments.
The government of Brazil first sets annual carbon
intensity reduction targets for individual fueldistributors over a ten-year time horizon. Then,biofuel producers undergo a certification process
for the fuels they produce to ensure the emissions
savings of their production is sufficient. Finally, if
a producer’s products achieve certification, it canissue decarbonization credits (“CBios”) equivalent
to one metric ton of CO2 equivalent, which canbe sold over an exchange.9 To meet the
decarbonization targets set by the government ofBrazil, fuel distributors will often purchase CBiosfrom biofuel producers, thus creating an
additional revenue stream for them.

In 2021, Brazil submitted its updated Nationally
Determined Contribution (NDC), committing tounconditionally reduce its total greenhouse gas
emissions 37% by 2025 and 50% by 2030,
compared to 2005 levels. Long-term, Brazil has
committed to achieving net zero by 2050.8
The National Biofuels Policy in Brazil(“RenovaBio”) was launched in December 2017,with the aim of supporting Brazil’s commitments
under the Paris Agreement. Given biofuels
comprise 32% of its total energy supply, Brazil’s
energy sector is already one of the least carbonintensive in the world. But there remains plentyof room to further decarbonize, and the country’s

Check out more ESG thought
leadership and media spotlights
at www.PGIMFixedIncome.com

Fastmarkets, “Brazil's Chamber of Deputies
approves proposal to raise biodiesel mandate to
20% in 2030,” March 18, 2024.
8 Federative Republic of Brazil, March 21, 2022.
9 USDA “Biofuels Annual,” September 5, 2023.
7

PGIM FIXED INCOME THIRD QUARTER 2024 OUTLOOK │ 22

PODCAST

BLOG

PART 1: NAVIGATING THE LOW CARBON
TRANSITION WITH TEMPERATURE
ALIGNMENTTHE CREDIT AND DECARBONIZATIONIMPACTS OF SUSTAINABLE AVIATION FUELWe delve deeper into this innovative tool and its rolein the low carbon transition.

We take a look at the aviation industry and how
it contributes about 6% to total global warming
annually. We examine what alternatives areavailable and their respective potential benefits.

GLOBAL SECTOR OUTLOOKSSECURITIZED CREDIT
Outlook: We continue to favor tranches at or near the
top-of-capital structure given their attractive relativevalue and risk-adjusted return potential. With spreads
at or through their historical averages, we expect themto remain rangebound, making “carry” the dominanttheme throughout 2024. While we acknowledge thatstrong market technicals could lead to further spreadand credit curve compression, we are positioning inshorter spread duration investments at/near the top of
the capital structure while being extremely selective
and tactical on more credit-sensitive investments asopportunities present themselves. Credit curves are tooflat in our view and the downside risks associated withtraveling indiscriminately down the capital stackoutweigh the potential rewards at this juncture. Thus,
we remain very keen on buying only fundamentallycheap bonds and not stretching on quality or credit.
In CMBS, a higher-for-longer rate environment
continues to pressure cap rates and thus valuations.
However, current CRE valuations better reflect thehigher interest-rate environment, and we are now
closer to the trough in valuations. Our expectation isthat property values could decline by about 20%
peak to trough, but dispersion will abound with
office likely to do the worst. While we believe CRE
transaction activity will begin to rebound in the latter
half of 2024, higher interest rates and a challenging
financing environment may continue to keep activity
suppressed. Notwithstanding weak transaction
volume, CMBS issuance has rebounded from 2023

PGIM FIXED INCOME THIRD QUARTER 2024 OUTLOOK │ 23

levels, led by an especially strong recovery in single
asset single borrower issuance. We continue to see
value within 5-year conduit AAA securities as
spreads look particularly attractive relative to similar
tenor IG corporate bonds. Down the stack, we
continue to see value in select single-asset singleborrower securities and are selectively adding
exposure.
◼ Within RMBS, we continue to see strong housing

fundamentals, which we believe will underpin ourinvestments in mortgage credit. While we see higher
mortgage rates weighing on affordability anddampening demand, months supply of existinghomes (while climbing) remains below the long-term
average, reflecting a tight housing market. Strong
underwriting practices continue to persist. Thus, we
remain positive on mortgage credit instruments
against the backdrop of a stable housing market.
Notwithstanding, we acknowledge mortgage
delinquencies have ticked up slightly in FHA andnon-QM mortgage pools. We currently see value in
RPL and second-lien bonds, which offer wider
spreads than corporates and other non-agency
securitized products. Despite our positive view on
mortgage credit, valuations of credit risk transfer
bonds (largely from Fannie/Freddie mortgages) are
stretched as spreads rallied significantly over the lastyear.
◼ CLO tranches continue to offer attractive relativevalue compared to many fixed income asset classes.
However, we remain cognizant of potential
downside scenarios as fundamental headwinds(credit concerns) exist in the underlying bank loansthat could outweigh ongoing technical support.
While bank loan spreads have been supported by
low net loan supply and strong demand, we expect
to see some credit deterioration in the underlying
CLO collateral via downgrades to CCC, increased
default rates, and lower recovery rates. Thus, we
continue to broadly favor senior CLO tranches in
the U.S. and in Europe, but are also seeing total
return opportunities in new issue mezzanine
tranches. In the U.S., we find value in selling higher
price bonds and rotating into higher spread primarytransactions. In Europe, the opportunity to purchasebonds at a discount, to a degree, offers total return
potential.

GLOBAL SECTOR OUTLOOKS | SECURITIZED CREDIT◼ In ABS, prime consumer credit remains

resilient. Notwithstanding, the effects of inflationand lower disposable income continue to weighon the weakest consumer segments and is starting
to weigh on the near-prime segment. Thus, we
remain vigilant for signals suggesting consumer
credit is weakening more broadly. We remain
positive on spreads in the near term, but are
mindful of heavy supply headwinds. We favor
top-tier unsecured consumer and subprime auto
issuers as performance is strong and relative value
is attractive. Significant risk transfer (SRTs)transactions also provide opportunities to get
exposure to high-quality consumer assets.
Looking forward, we expect increased banking
regulation may lead to more opportunities via
asset sales or regulatory transactions.

PGIM FIXED INCOME THIRD QUARTER 2024 OUTLOOK │ 24

GLOBAL SECTOR OUTLOOKSINVESTMENT GRADE CORPORATESOutlook: Against a backdrop of rising stock prices
and relatively low volatility, tight valuations are evident
in the IG corporate market. Given relatively tightspread levels and the potential risks laid out below, weare expecting spreads to end Q3 modestly wider thancurrent levels. This may prolong the relative
attractiveness of current yield levels.
◼ As we have previously cited, a key factor

supporting the U.S. IG market has been thehistorically high interest rate levels. Therefore, when
10-year Treasury rates started falling from the mid4.60% area in late May, to the current 4.30%, it was
not surprising to see spreads on the IG Index widen
slightly.

◼ Still, there are a number of positive factors that

◼ Additionally, while merger activity has picked up,

should support the IG market in Q3. First andforemost is the underlying economic backdrop. Ourbase case is for moderating inflation in the U.S. anda reduced probability of recession. Furthermore,
inflation data that are steadily improving towards
the Federal Reserve’s 2% target is contributing tolower rates, which still appear historically attractive.

much of it has been funded with equity andgenerally been benign for bondholders.

◼ Another strength is that the technical picture in

IG remains robust, with steady inflows frompension plans and insurance companies. On the
supply side, YTD gross supply has been high, but
net supply is expected to taper off in the second
half of 2024 as many issuers may have pre-fundedahead of potential volatility.

◼ Potential market risks include: emerging signs ofcorporate weakness. While earnings are firm andcredit fundamentals remain satisfactory, credit
metrics are certainly weaker than the peak.
◼ Consumer spending. Similarly, U.S. consumers

continue to spend, but are now prioritizing
essentials, reducing discretionary purchases, and/or
trading down. This is due to persistently highinflation, a relatively high cost to borrow, anddepleted COVID-era savings.

Considering the historically tight compression between 1.85
BBB and A spreads, we’re favoring allocations of higher
credit quality and with enhanced liquidity (percentage
1.75
points).
1.65

1.55
1.45

Source: Barclays (as of May 2024)
PGIM FIXED INCOME THIRD QUARTER 2024 OUTLOOK │ 25

1.35
2019

2020

2021

2022

2023

2024

GLOBAL SECTOR OUTLOOKS | INVESTMENT GRADE CORPORATES◼ Increasing event risk. As mentioned earlier, M&A

thus far has been benign, but as management teams
worry less about a recession and grow accustomed tohigher rates for longer, they may become moreaggressive in seeking out inorganic growth
opportunities.
◼ 2024 is an incredibly active year for elections

globally. We have already seen that out of consensus
outcomes in Mexico, India, and France have led tovolatility spikes in those markets. Therefore, in thelead up to the U.S. elections in November, U.S.
markets may become more volatile.
◼ From a positioning standpoint, with tightvaluations at the overall index level as well as in BB
spreads, BBB/A spreads, and 10s/30s spread curves,
we look to go up in quality, up in liquidity, and reduce
spread duration until better relative value
opportunities present themselves. We continue tofavor the banking, utility, and pipeline industries.
◼ The ECB has done its first rate cut and significant

downside economic misses are more tail risks. Euro
spreads now sit 30bps back from U.S. While this ison the cheap side, short-term conviction that they
will recompress given all the uncertainties in France islimited. The uncertainty in French politics will cause
spreads to sit wider in the near term.
◼ European spreads are 17 bps tighter YTD. They

were hovering around their tights until fear over the
French elections gripped the market in mid-June,
leading to spreads widening 9 bps. In the near-term,

PGIM FIXED INCOME THIRD QUARTER 2024 OUTLOOK │ 26

French political uncertainty will continue to be thekey focus of the market. With that stated, the Frenchbanking fundamental are resilient to any widening as
the capital position of these banks are not overweightsovereign bonds (which are typically held at cost).
French banks, which widened ~25-30 bps following
the election announcements have recovered ~5060% of the widening as of July 1st.
◼ For now, the tail risk of far-right / far-left majority

or Macron resignation was ruled out after France's
second election on July 7th. Risks of a far-rightabsolute majority was pushed further into the tail as
the left and center managed to contain the rise of theright through coalitions.
◼ Risks that have been around YTD are still in place– e.g., sensitivity to energy prices and their feedthrough to inflation, Russia /Ukraine, limited
economic growth and inflation (albeit this has beenfalling fast), however these factors have moved
further into the tail reflecting less of a need for risk
premium.
◼ In terms of positioning, we are long credit spreadrisk and neutral spread duration in the Euro funds.
EUR risk in our portfolio(s) is at their lows comparedto the past few years. Risk was cut as spreads rallied.
In the globals, we have a similar risk position with asmall underweight in spread duration and a moderateskew to having more risk in the Euro side of theportfolio.
◼ Assuming OAT-Bund spreads stays within the 65-

100 bps range, there is opportunity to add active
market overweights to French banks on the front end(in USD, while remaining somewhat flat spread
duration risk).

GLOBAL SECTOR OUTLOOKSGLOBAL LEVERAGED FINANCE
Outlook: Market technicals remain supportive, yields
remain elevated, but spreads appear close to fair value—
the market is largely in a carry phase. Geopolitical flareups may provide opportunities to add risk. Active andaccurate credit selection will continue to be rewarded.
◼ With U.S. high yield spreads hovering near post-

GFC tights, we believe they are close to fair value
and we expect excess returns to come mostly fromcarry in Q3 2024. While the economic backdrop andoverall high yield fundamentals are generally
supportive of tighter spread levels, we believe themarket is underpricing global geopolitical risk anduncertainty regarding the U.S. elections. Therefore,
we maintain a slightly cautious outlook. That said,
any geopolitical flare-up will likely provide an
opportunity to add risk, as most instances typicallycause only temporary spread widening.

Distressed Exchange Activity Across High Yield
and Loans ($B)

◼ While the credit ratings profile of the high yield

market is very strong by historical standards andbalance sheets for high yield issuers remain solid,
fundamentals are no longer on an improving
trajectory as revenue growth appears to be stalling.
Overall, U.S. high yield issuers are enjoying margin
expansion and able to pass through and hold onto
price increases. However, higher costs are leading tosome margin deterioration in certain sectors.
◼ The lagged effects of higher policy rates andtighter lending standards from banks remain
headwinds to economic growth. Unemployment
remains at historically low levels, fueling continued
consumption. However, should the labor market
weaken and consumers pull back, downward
pressures on corporate earnings and profit margins
will increase. Moreover, as high yield issuers areforced to refinance debt at higher interest rates,

higher interest costs will continue to lead tocontinued deterioration in coverage ratios—albeit
from very high levels.
◼ Due to the strength of most issuer’s balance

sheets, the absence of a significant maturity wall
through 2024, manageable maturities in 2025 and2026, and the declining probability of a recession, we
expect default rates to remain flat or even decline
over the next 12 months. That said, the increased
frequency of aggressive liability management
exercises and distressed exchanges from sponsoredissuers bears watching as the $21.7 billion in activity
across high yield bonds and loans thus far in 2024
already ranks as the third highest annual total.

40

35
30
25
20

15
10
5
0
Source: JP Morgan
PGIM FIXED INCOME THIRD QUARTER 2024 OUTLOOK │ 27

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 YTDGLOBAL SECTOR OUTLOOKS | GLOBAL LEVERAGED FINANCE◼ Meanwhile, the technical backdrop remains

supportive due to a variety of factors, including
muted net new supply. Given the continued
supportive market technical, we expect spreads toremain flat or to slightly tighten over the near term,with ample tail risk from risks outside of the highyield market. Longer term, we are attuned to therisks to the economy from a sustained period of highreal interest rates.
◼ We are maintaining overweights to homeconstruction as well as the electric and independent
energy sector names, while maintaining underweights
in technology, retailers, consumer cyclical services,media & entertainment, and property & casualty. We
remain overweight cable & satellite but are trimming
our exposure to the sector. We are currently looking
to add high-quality cash bonds with a preference forshort duration issues. Due to the idiosyncratic natureof the market, it is possible to generate alpha in the
CCC-and-below portion of the market throughcareful credit selection.
◼ Following the strong first half returns, we raised

our U.S. leveraged loan total return forecast to 8.08.5% in 2024. Our forecast is supported by high allin current coupons and yields, strong CLO
formation, continued inflows into bank loan funds,
loan paydowns, and modest net new supply as
refinancing and repricing activity continues to makeup the bulk of capital market activity. Embedded
into our forecast is the strong total returns
experienced thus far in 2024 and the expectation ofhigher-for-longer SOFR rates, along with the

PGIM FIXED INCOME THIRD QUARTER 2024 OUTLOOK │ 28

expectation that loan prices will hover aroundcurrent levels barring any unforeseen macro event.
◼ Loan defaults rates eased in recent months but

remain slightly above their long-term average amid
rising corporate headwinds and higher interest rates.
We expect the higher cost of capital to continue topressure free cash flows of lower-quality, sponsorowned companies for the remainder of 2024.
However, we don’t anticipate a significant rise indefault rates through the remainder of 2024, withloan default rates (including distressed exchanges)
expected to remain in the 3-5.5% range throughyear-end 2024 and cumulative defaults of 10%
through 2025.
◼ We continue to favor public, BB and high single-B

loans over sponsor-owned, low single-B and CCC
loans as we expect those lower-quality loans to be
most impacted by the challenging fundamental
backdrop. We believe that credit selection and deep,
fundamental credit research/modeling is becoming
increasingly important, and that the avoidance ofdefaults will be the biggest driver of alpha over the
next 12–24 months.
◼ Spreads for European high yield and European

loans tightened significantly in 1H24 as markets
priced in a lower probability of recession over the
next few months and market technicals remained
supportive. We expect spreads to remain
rangebound in Q3 barring any unforeseen shocks.
Yields remain attractive on an absolute basis and we
expect both the high yield and loan markets togenerate positive excess returns over the next 12months on a probability-adjusted basis for various
economic scenarios.
◼ We expect defaults to remain around current

levels for the next 12 months. The vast majority ofthe market is high quality, performing businesses,
keeping defaults at these relatively benign andmanageable levels. That said, there remains adispersed and dislocated tail of default candidates–
carefully selecting overweights and underweights inthis part of the market will continue to be ameaningful performance driver.
◼ In terms of positioning, we are running market

neutral levels of risk given our view that spreads are
at / close to fair value. We are backing our top
relative value picks to generate alpha. Any short-term
volatility from macro events (e.g. the Frenchelections) could present an opportunity to add risk.
Ultimately, we think active and accurate credit
selection will continue to be rewarded.

GLOBAL SECTOR OUTLOOKSEMERGING MARKET DEBT
Outlook: Constructive on EM hard currency, but mindfulof global election outcomes and policy headwinds. Shortterm dislocations may surface if risk sentiment
deteriorates. In local rates and FX, the persistently strong
U.S. dollar and the repricing of Fed rate-cut expectations
argues for tactical relative-value positioning.

flows and FDI flows remain positive.
◼ From a long-term perspective, our strategic

allocations to EM remain focused on a set of central
premises. These include the critical role that EMs
play in supply chain realignments, the commodity
supply/demand relevance to energy transition and to
broader geopolitical determinants, and how EM
countries will effectively leverage their role vis-à-vis
the “Great Power Competition” (i.e., how they best
utilize willingness of DM/China to accommodate
financing/partnerships/alliances to their best
advantage).

◼ We continue to view EM through the constructive

fundamental prism, but our short-term positioning isfocused on factors that can outweigh the carryadvantage in EM. These include the potential
slowing of the U.S. economy, global fiscal pressures,and shifting domestic and geopolitical alliances.
While retail fund flows continue to be negativeacross EMD, two counterpoints add context to that
sentiment: 1) significant supply has been wellabsorbed, and a negative credit funding shock is
unlikely if the backdrop deteriorates; and 2) portfolio

EM Hard-Currency Government Bonds◼ The prospects for hard currency EM debt lookappealing, but there are headwinds that requiredeliberate positioning, and the opportunity set is

1-year Hard Currency
expected return analysis

Spread change (bps)

UST yield change
Source: PGIM Fixed Income

shifting with valuations. The increased probability ofmoderate economic conditions in the U.S. andEurope—coupled with solid EM growth and thehigh carry of EM hard currency sovereigns—is very
attractive. While China growth has surprised to theupside, without sufficient stabilization in theproperty market and additional stimulus, sentiment isunlikely to recover enough to help consumption andrebalance growth over the medium term. Moreover,geopolitical headwinds persist: we are no closer to a
resolution in Ukraine, U.S.-China tensions will likely
increase, and a ceasefire in Israel remains uncertain.
Elections within EM countries continue to surprise,
and the U.S. election in November adds anotherdose of uncertainty.

Widening←

Unchanged→

Tightening

150

100

75

50

25

0

-25

-50

-75

-100

100

-6.7%

-3.4%

-1.8%

-0.2%

1.4%

3.0%

4.6%

6.3%

7.9%

9.5%

50

-5.1%

-1.8%

-0.2%

1.4%

3.0%

4.6%

6.3%

7.9%

9.5%

11.1%

0

-3.4%

-0.2%

1.4%

3.0%

4.6%

6.3%

7.9%

9.5%

11.1%

12.7%

-50

-1.8%

1.4%

3.0%

4.6%

6.3%

7.9%

9.5%

11.1%

12.7%

14.3%

-100

-0.2%

3.0%

4.6%

6.3%

7.9%

9.5%

11.1%

12.7%

14.3%

16.0%

-150

1.4%

4.6%

6.3%

7.9%

9.5%

11.1%

12.7%

14.3%

16.0%

17.6%

-200

3.0%

6.3%

7.9%

9.5%

11.1%

12.7%

14.3%

16.0%

17.6%

19.2%

Recession 19%

PGIM FIXED INCOME THIRD QUARTER 2024 OUTLOOK │ 29

Nominal GDP
Boom 10%
Weakflation 19%
Soft landing 49%
Roaring 2020s 3%

GLOBAL SECTOR OUTLOOKS | EMERGING MARKET DEBT
◼ Within the BBB and BB issuers, carry remains◼ Elsewhere, we see solid opportunities in IG

very attractive with solid spread pick-ups overdeveloped market corporates and sovereigns.
However, most countries trade at the tight end of
historical ranges, and bottom-up analysis remains asnecessary as ever. Risks remain, particularly fromdomestic politics. June saw a number of election
surprises (e.g., Mexico’s Morena party winningsignificant majorities in congress, while India’s BJP
party and South Africa’s ANC need to form
coalitions to govern).

sovereigns Saudi Arabia and Romania and quasisovereigns, particularly in Qatar, Indonesia, andUAE. The opportunity set expands within BB
issuers, with healthy spreads in Brazil, Serbia, Ivory
Coast, Colombia, Guatemala, Costa Rica, andMorocco sovereigns and quasi-sovereigns.

◼ In Mexico, the Morena party has the ability toreform the constitution, which could potentiallydiminish “checks and balances” and increase the roleof the state. This could jeopardize foreign direct
investment and potentially impact Mexico’s
investment grade status down the road. It could also
benefit Pemex as Scheinbaum, a former energy
engineer and climate activist, has a focus on ESG
and may look to improve Pemex’s balance sheet
through liability management exercises. We see
opportunity in Pemex and Mexican quasi-sovereigns
and corporates but prefer to remain underweight thesovereign. While the elections in India and South
Africa also surprised, the outcomes likely have asmaller impact on spread markets. India’s growth
may slow, but it will remain elevated and supportiveof our corporate and quasi-sovereign positioning.
South African policy needs to be monitored, butthus far the formation of the GNU seems to havemet expectations and the quasi-sovereigns remain
attractive.

PGIM FIXED INCOME THIRD QUARTER 2024 OUTLOOK │ 30

◼ Within the lower-quality issuers, we are seeing

improvement amongst several stressed-performing
issuers that have drawn concerns for some time.
Egypt has grown reserves meaningfully, Turkey isimplementing policy adjustments, Ecuador’s fiscal
adjustment appears credible with IMF support,
Pakistan has a stable government while adhering to
IMF conditions, Nigeria has removed costly
subsidies, and even Argentina is making progress.
However, the durability of progress is not a given
and politics remain fickle in many situations. U.S.
elections may have an impact on multi-lateralfinancing, which has been concessionary over thelast four years, therefore the sustainability of reforms
is imperative. Within the stressed-performing space,
we believe Ecuador, Egypt, Angola, Senegal, andPakistan offer very good value for their risks.
◼ Within the non-performing space, Zambia has justcompleted a restructuring, while Ghana and Sri
Lanka appear to be close to restructuring. We seegood opportunities in both Zambia and Ghana
based on their ability to grow and reduce exit yields
post their respective restructurings. We have lessfaith in Sri Lanka’s ability to reduce its bloated stateowned enterprise sector and produce sustainable

results once it restructures. The situations in Ukraine
and Venezuela/PDVSA remain very fluid. However,select securities in both appear to offer good riskreward profiles based on current prices, but sizing is
key.
◼ Longer term, there are a number of tailwinds thatwill help EM spreads: EM-DM growth differentials
are high and expected to widen, EMs are maturingfrom the perspective of debt structure, geopoliticalimportance, as well as GDP growth, and EM
economies are set to benefit from U.S.-China
competition (via supply chain reorganization andfinancing) and favorable demographics.
EM Hard-Currency Corporate Bonds◼ Although EM corporate spreads have tightened

and are now well through their historical average
and, in some cases, have compressed close to fairvalue, we believe the outlook is still favorable given
the ~7% yield on the asset class, resilient
fundamentals, negative net supply, and supportive
macroeconomic conditions. The maturity wall of2025 and 2026 has been extended, and we expect
EM corporate high yield defaults to remain within
the historical range of 3-4%, in-line with developed
markets. Other points of support include fewer
idiosyncratic surprises, non-dedicated investors who
have shown resurgence in appetite for the asset class,and, while gross issuance is higher than expected, net
financing will likely remain negative.

GLOBAL SECTOR OUTLOOKS | EMERGING MARKET DEBT
◼ We still see the best value in EM Corporate BBs◼ We are constructive on local markets from a

at current spread levels of 320 bps and selectlonger-dated BBB issuers at current spread levelsof around 175 bps. We continue to maintain core
overweights in Brazil, Mexico, and India
corporates amidst the countries’ respective politicaldevelopments. We added some Turkish corporates
earlier this year at very attractive valuations, andselectively added some copper and zinc names
given the strong commodity outlook. We also likebanking tier-2 issues in Peru, Colombia, andThailand. Some semi-distressed issuers in sectors,
such as chemicals and LatAm telecom, haverecovered strongly from the lows, but we believe
there could be some further upside given
stabilizing fundamentals. We remain very cautious
on China but have covered some China high yieldunderweights in relevant portfolios. Risks to theasset class include credit stress related to higher
funding costs, an economic slowdown, andgeopolitical risk

top-down perspective. With the U.S. economy
showing some signs of a slowdown and the Fed’s
presumed rate cuts gradually materializing, we
believe that a repeat of March/April selloff in the
U.S. rates is unlikely. At 6.60%, the Index yield isstill in the top end of the year-to-date range of
6.10-6.65%. If the Fed cuts rates in September, it
would provide a tailwind to an oversold asset class.

EM Local-Currency Rates◼ So far in 2024, EM local rates haveunderperformed core rates. Broad U.S. dollar
strength, sticky service inflation, widening fiscal
deficits, and recent election results have not only
caused the underperformance, but they have alsointerrupted monetary easing cycles in many
countries, i.e., Brazil. Mexico, Colombia, Indonesia,and Hungary.

PGIM FIXED INCOME THIRD QUARTER 2024 OUTLOOK │ 31

◼ From a bottom-up perspective, widening fiscal

deficits in most EM countries and recent election
surprises in South Africa, Mexico and India present
some challenges to the “country selection” process.
Based on inflation trends, we see a wide dispersion
among EM central banks’ monetary stance. Brazil,
Chile, Czech, and Hungary are closer to ending
their easing cycle, while Mexico, Colombia, andPeru have scope to continue their easing. Central
banks in Asia and South Africa are likely waiting
for the Fed before cutting rates. A further
tightening in Indonesia cannot be ruled out.
◼ Given the poor performance of EM local rates

this year, we believe that many of the concerns arelikely priced in, and Q3 should be played from theoverweight side. In our barbell approach, we are
overweight high beta names, such as Brazil,
Mexico, and Hungary, and low beta names, such as
India, Czech, and Thailand. Our preferred tenors
are 5 to 10 years. Main risks to our constructive
outlook stem from a possible resurgence of

inflation in the U.S. leading to a selloff in U.S. rates
and a failure to consolidate fiscal deficits in Brazil.
Mexico, Colombia, South Africa, and Indonesia.
As a result, we are measured in our sizing of our
local rates positions.
EM Currencies◼ Bottom-up election outcomes and/or fiscal

concerns (Mexico, Brazil, Colombia, andIndonesia) coupled with a top-down undercurrentof slowing global nominal growth, prompted
investors to demand higher risk premiums via
cheaper currencies so far in 2024. At the sametime, the Fed appears in no hurry to cut rates andis for now comfortable with a “higher-for-longer”
policy stance. In the early stages of Q3, we believe
central bank policy divergence (whereby the Fed isslow to cut rates while EM central banks continue
to cut) is supportive of U.S. dollar strength.
◼ While the combination of U.S. dollar strength,

slowing nominal growth, and election and fiscal
concerns in select countries seems like an
unfavorable backdrop for EM currencies, a few
themes provide reason for optimism as Q3
progresses.

GLOBAL SECTOR OUTLOOKS | EMERGING MARKET DEBT
◼ To begin with, EM currencies have alreadyrepriced—by a lot in some cases (MXN, BRL,
COP, IDR, and ASIA as a whole). Moreover,recent U.S. CPI prints have been encouraging andslowing growth is shifting the asymmetry towards
potentially more rather than fewer Fed cuts.
Additionally, there are select high carry
opportunities with improving bottom-up stories(e.g., Turkey, Egypt) and attractive opportunities instable bottom-up stories (e.g., India, Poland).
◼ Given the underperformance in the first half of2024 and the evolving outlook for Fed rate cuts,
we would not be surprised if the first half’s
negative performance eventually leads to a positive
second half. While top-down and bottom-up
concerns are front and center, we could see thebackdrop improve toward the end of Q3 even if
more repricing occurs and a more dovish Fed
emerges. For now, we are positioned
predominantly in relative value and have a small,long U.S. dollar bias. We still favor high-carry over
low-carry currencies. Our top longs are the Turkishlira, the Egyptian pound, the Brazilian real, theIndian rupee, and the Indonesia rupiah, while top
shorts include the Chinese yuan, the Thai baht, theSouth Korean won, the Czech koruna, and the
Taiwan dollar.

PGIM FIXED INCOME THIRD QUARTER 2024 OUTLOOK │ 32

GLOBAL SECTOR OUTLOOKS

Total Muni Issuance Vs Redemptions(Par Amount (USD Millions)

MUNICIPAL BONDS
Outlook: We believe the market will continue to besupportive and stable. Absolute yields remain
attractive by historical standards along withmuni/Treasury yield ratios. This should continue todrive investor demand, causing spreads to remaintight. In addition, elevated supply is expected to fadeas we approach election season and BAB
refinancings die down, further supporting market
performance. As investors continue to acclimate to
the “higher for longer” interest-rate environment,
rangebound trading in Treasuries should also be a
supportive technical.
◼ Last quarter, markets came to the realizationthat the aggressive cut schedule initially priced inwould not materialize. Despite rates repricing
higher, spreads tightened significantly. This led tohealthy performance from HY, while IG
performance lagged.
◼ To date, muni issuance is running ~35% aheadof last year. The elevated supply was caused by: 1)
a decrease in rate vol (MOVE down ~25% YTD)
and issuers adjusting to the higher-rateenvironment; 2) a recognition of deferred
maintenance and a stabilization of project cost as
inflation comes down (Transportation running
75% above last year and Healthcare running
127% above last year); 3) BAB calls moving
money from taxable to tax exempt (~$12billion);and 4) election years typically have elevatedissuance in 1H vs 2H. With that stated, an
PGIM FIXED INCOME THIRD QUARTER 2024 OUTLOOK │ 33

estimated $120 billion of reinvestment should
power market performance through the summer.

50,00040,000◼ Fundamentals remain a bright spot for munis

as tax collections remain healthy and rainy day
funds robust. Two states, MD and CA, havenegative outlooks and CT’s outlook was upgradedto a positive. In fact, upgrades continue tooutpace downgrades, although the ~1.3x ratio
pales in comparison to last year’s ~3.6x, which
was the highest since 2009 and 2007.
◼ Positioning: We are sanguine on states' credit

quality, preferring to pick up certain state namesthat are trading wider. The most challenged
sectors by the rating agencies have been higher
education and healthcare. More generally, we're
remaining up in credit quality and assessing offthe-run structures that enhance yield, but do notincrease credit risk.
◼ Tax Policies: With tax cuts rolling off in 2025,

the demand picture for munis could be materiallyreshaped, depending on the election outcomes.
For example, it remains to be seen if either
candidate will target the tax exemption as a meansof paying for other spending priorities.
◼ Taxable Munis: Other than a shrinking

taxable market as a result of the BAB financing,taxable muni activity has been muted this year. A
dearth of issuance and an active corporate market
has removed spotlight from the sector.

30,00020,00010,000

0January 2024

April 2024

Total issuance

July 2024

October 2024

Total Principal Redemptions

Source: Bloomberg as of June 2024.

ERP subsidy cuts(% by year)
450
400
350
300
250

200
150
2019

2020
IG vs. HY Munis

2021

2022
Avg

Source: Barclays Research and IRS as of March 2024.

2023

2024

SECTION 5

SUMMARIESPGIM FIXED INCOME THIRD QUARTER 2024 OUTLOOK │ 34

SUMMARY OF OUTLOOKS & ASSET CLASS VIEWSThis summary consists of our short- and long-term (1-yr) sector outlooks. The latter is based on a scale of 1-10 and indicates
our expectation for the sector’s excess return relative to its broader, regional fixed income market (which is assigned its own
1-10 market score in the box to the right). A sector score of 1 represents an expectation for it to vastly underperform themarket, and 10 indicates an expectation for the sector to vastly outperform the market. 1

Market Scores
NEGATIVE
VIEW

POSITIVE
VIEW

U.S.

EuropeEM

SectorShort-term Outlook

DM Rates

Maintaining a tactical approach as fiscal-related concerns linger and yield curves show signs of re-steepening. Market dynamics
may continue to shift as rate differentials apply pressure to certain regions.

U.S.

UK

EuropeJapan

AgencyMBS

Positive in the short-term given current valuations, limited supply, and potential domestic bank demand. We prefer
underweights to production coupons (6% issues and up) as the convexity profile continues to worsen.

Agency MBS

Securitized
CreditWe continue to favor tranches at or near the top-of-capital structure given their attractive relative value and risk-adjusted return
potential. With spreads at or through their historical averages, we expect them to remain rangebound, making “carry” thedominant theme throughout 2024. We are positioning in shorter spread duration investments at/near the top of the capital
structure while being extremely selective and tactical on more credit-sensitive investments as opportunities present themselves.
Credit curves are too flat in our view and the downside risks associated with traveling indiscriminately down the capital stackoutweigh the potential rewards at this juncture. Thus, we remain very keen on buying only fundamentally cheap bonds and notstretching on quality or credit.

CMBS

Against a backdrop of rising stock prices and relatively low volatility, tight valuations are evident in the IG corporate market.
Given relatively tight spread levels and the potential risks laid out below, we are expecting spreads to end Q3 modestly wider
than current levels. This may prolong the relative attractiveness of current yield levels.

U.S. Corps. 1-10

European Corps. 1-5

U.S. Corps. 10+

European Corps. 5+

Market technicals remain supportive, yields remain elevated, but spreads appear close to fair value—the market is largely in acarry phase. Geopolitical flare-ups may provide opportunities to add risk. Active and accurate credit selection will continue to be
rewarded.

U.S. High Yield 1-5

Euro High Yield BB

U.S. High Yield 5+

Euro High Yield B

Global IG
Corporates

GlobalLeveraged
FinanceLong-term (1-yr) Outlook1

ABS

CLOs

U.S. Leveraged Loansand below
Euro Leveraged LoansEM Debt

Municipal
Bonds

Constructive on EM hard currency, but mindful of global election outcomes and policy headwinds. Short-term dislocations may
surface if risk sentiment deteriorates. In local rates and FX, the persistently strong U.S. dollar and the repricing of Fed rate-cut
expectations argues for tactical relative-value positioning.

We believe the market will continue to be supportive and stable. Absolute yields remain attractive by historical standards alongwith M/T ratios. This should continue to drive investor demand, causing spreads to remain tight. In addition, elevated supply is
expected to fade as we approach election season and BAB refinancings die down, further supporting market performance. As
investors continue to acclimate to the “higher for longer” interest rate environment, rangebound trading in Treasuries should
also be a supportive technical.

Sov. Hard Currency IG

EMFX2

Sov. Hard Currency HYCorps. IG

Local rates2

Corps. HY

Taxable1 The positioning in a respective portfolio may not be identical to the long-term ratings. The ratings and information herein is for comparison purposes.
2 The scores on the indicated asset classes are on an absolute basis; i.e., the expectations for risk-adjusted market returns are embedded within the asset class specific returns.

PGIM FIXED INCOME THIRD QUARTER 2024 OUTLOOK │ 35

GEOPOLITCAL OUTLOOK SUMMARYWith no shortage of geopolitical hotspots, the following summary page provides our scenario analysis of the respective situations along with signposts to watch over the coming
months and quarters.
Key geopolitical risks(base case and assumptions)

Escalation of Russia's War vs Ukraine
Attritional war with risk of escalation (80%)
Assumptions: Positional warfare persists, with no major changes
to frontlines.

Expansion of Israel - Hamas War
Conflict remains limited to Gaza (50%)
Assumptions: Major regional players against expanded conflict. KSA &Iran truce holds up. Israel-Iran locked in shadow war despite “change inequation” retaliatory attacks.
Escalating Military Tensions on the Korean Peninsula
NK's nuclear and diplomatic coercion (80%)
Assumptions: Build up of conventional/ nuclear capability to undermine
security status quo and coerce diplomatic recognition as nuclear state

Escalating Dispute Between China and Philippines
Uneasy status quo with risks of accidental military confrontation (65%)
Assumptions: Philippines strengthening military ties with U.S.;
challenging China's presence in disputed islands

China's Military Invasion of Taiwan
China continues to erode status quo in preparation for takeover shortof war (85%)
Assumptions: China prepares ground for reunification using coercive
tools / deterrence against U.S.' involvement.

Source: PGIM Fixed Income.
PGIM FIXED INCOME THIRDSECONDQUARTERQUARTER
2024
2024
OUTLOOKOUTLOOK││
36 36

Signposts

Benign Case

Adverse Case

Continued support from West.
Battlefield breakthroughs (lackthereof). Secondary sanctions. Next
U.S. President.

Mutual understanding that victory is
impossible. Fragile ceasefire withexternal participation. West -Russia
security talks

Faced w/ defeat Russia responds via
WMDs, risking escalation with NATO
(5%)

Diplomatic progress; Israeli and U.S.
politics. Iran's actions and China's
engagement.

Long-term ceasefire. Hostage
diplomacy succeeds. PA-led admintakes over. Israel accepts discussionof two-state solution—Gaza
reconstruction.

Wider ME conflict in Gulf region,
including the U.S. and Iran KSA-Irantruce breaks down (40%)

Advance of nuclear program.
Perceived
strength of U.S./allies' deterrence.
China and Russia's relationshipwith NK.

Return to status quo.
Denuclearization talks resume inexchange for sanctions relief.

War with SK, including potential use
of nuclear weapons. Nightmare
scenario—attack coincides with
China's invasion of Taiwan (15%)

Continuation of China's coercive
actions against Manila; re-launch ofbilateral, regional treaty talks.

Pre-Marcos status quo: Philippines
and China launch negotiations
resulting in cooperation to address
disputes.

Military conflict. Fear of wider
credibility gap forces US toact (25%)

Current status quo broadly persists.

War over Taiwan: Taipei
pushes for & US supports
independence. Misunderstandings
lead to Chinese invasion (5%)

Continued U.S. support and its"strategic ambiguity" policy. Whether
Taiwan's Lai signals drive forindependence.

Direction andimpact
Rising/highRising/highRising/highRising/highStable/High

SUMMARY OF MARKET PERFORMANCE

SectorCMBS

NonAgency
RMBS

CLOs

ABS

Spreadchange(bps) Q2

SOFR OAS
6/30/24

10

135

CMBS: Conduit AAA

Subsector
First-pay
10-year

CMBS: Conduit BBB-

BBB-

-112

666

CMBS: SASB – Senior

AAA

20

170

CMBS: SASB – Mezz

BBB-

10

300

CMBS: Agency Multifamily

Senior3

87

LegacyRPL Senior

4147

Legacy’06/’07 Alt-A

5240

GSE Risk-Sharing

M2

-20

160

CLO 2.0

AAA-15

CLO 2.0

AA

CLO 2.0

Total return
(%)
Q2
YTD

Spread / yieldchange (bps)
Q2
YTD

EM Hard Currency

0.30

2.34

49

7

391

EM Local (Hedged)

0.54

0.74

33

41

6.60

EMFX

-0.27

-1.38

-31

-118

7.75

EM Corps.

1.49

3.85

-9

-46

267

OAS (bps)/
yield %
6/30/24

Source: J.P. Morgan.

Q2

YTD

Q2

YTD

OAS/
DM (bps)
6/30/24

U.S. High Yield

1.09

2.58

10

-14

309

135

Euro High Yield

1.39

3.23

12

-29

370

-25

170

U.S. Leveraged Loans

1.86

4.44

4

-22

524

BBB

-50

295

Euro Leveraged Loans

2.39

4.98

-19

-37

497

Unsecured Consumer Loan ABS

Seniors

15

136

Source: ICE BofAML and Credit Suisse.

Unsecured Consumer Loan ABS

Class B

0

171

Refi Private Student Loan

Seniors5

141

Credit Card ABS

AAA

8

69

Source: PGIM Fixed Income.

Total Return (%)

Spread Change (bps)

OAS (bps)

Q2

YTD

Q2

YTD

6/30/24

U.S. Corps.

-0.09

-0.49

4

5

94

European Corps.

0.08

0.54

6

-18

120

Total return (%)

Spread change (bps)

Total return (%)

Q2

YTD

High Grade Tax-exempt

-0.02

-0.40

High Yield Tax-exempt

2.59

4.14

Long Taxable Munis Agg. Eligible

-0.64

-0.90

Source: Bloomberg. Represents the Bloomberg Municipal Bond Indices.

Source: Bloomberg. Represents data for the Bloomberg U.S. Corporate Bond Index and theBloomberg European Corporate Bond Index (unhedged).

Past performance is not a guarantee or a reliable indicator of future results. See Notice for important disclosures. All investments involve risk, including possible loss of capital. An investment cannot be madedirectly in an index. All data as of June 30, 2024.
PGIM FIXED INCOME THIRD QUARTER 2024 OUTLOOK │ 37

PGIM FIXED INCOME THIRD QUARTER 2024 OUTLOOK │ 38

PGIM FIXED INCOME THIRD QUARTER 2024 OUTLOOK │ 39

留意事項
※ 本資料はPGIMフィクスト・インカムが作成したものです。PGIMフィクスト・インカムは、米国SEC 登録投資顧問会社であるPGIM インクのパブリック債
券運用部門です。
※ 本資料は、当グループの資産運用ビジネスに関する情報提供を目的としたものであり、特定の金融商品の勧誘又は販売を目的としたものではありません。また、本資料に記載された内容等については今後変更されることもあります。
※ 記載されている市場動向等は現時点での見解であり、これらは今後変更することもあります。また、その結果の確実性を表明するものではなく、将来の市場環境の変動等を保証するものでもありません。

※ 本資料に記載されている市場関連データ及び情報等は信頼できると判断した各種情報源から入手したものですが、 その情報の正確性、確実性について当社が保証するものではありません。
※ 本資料で言及されている個別銘柄は例示のみを目的とするものであり、特定の個別銘柄への投資を推奨するものではありません。

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PGIMジャパン株式会社

金融商品取引業者 関東財務局長（金商）第392号
加入協会 一般社団法人 投資信託協会 、一般社団法人 日本投資顧問業協会、一般社団法人 第二種金融商品取引業協会
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PGIM FIXED INCOME THIRD QUARTER 2023
2024 OUTLOOK │ 40