PGIM Global Total Return Fund Q2 2024 Commentary

seekingalpha08-27

The Fund outperformed its benchmark, the Bloomberg Global Aggregate Bond Index, on a gross basis.Overall sector allocation also contributed, with overweights to the EM investment grade, EM high yield,...

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However, higher yielding sectors, such as high yield corporates and hard currency emerging markets (EM) debt, continued to post positive returns, albeit at a slower pace than in 2023. Even with the probability of rate cuts, long-term yields are likely to remain centered around current levels, as a fair amount of rate cuts have already been priced in as evidenced by the significant inversion of government yield curves. In addition, a 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., disinversion) of the yield curve with the outcome being little change in the range for long rates, despite any drop in short rates. \"Moderation\" defines our macro expectations for the U.S., the Euro Area, and China for the coming 12 months. In the U.S., our moderation base case (35%) is one where the rate of inflation drops below 2.5%. While base effects may keep U.S. inflation near 2.5% in the months ahead, the Federal Reserve (Fed) may go to notable lengths to explain why that dynamic shouldn't prevent it from cutting rates. That stated, if the Fed is hindered from cutting rates this year, it could shift those cuts into 2025, and we see a total of 150 basis points (bps) in Fed rate cuts through next year. In the Euro Area, our macro base case (40%) also moves from weakflation to moderation. The scenario sees economic momentum building towards potential (c.1.5% y/y) and inflation easing towards the 2% target over the next 12 months. Lower energy prices further boosted household spending. Periphery outperformance continued amidst Next Generation EU (NGEU) spending supply side reforms. The European Central Bank (ECB) kept its options open regarding the timing of future policy decisions following its June rate cut. 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 prior easing cycles. In addition, with UK inflation expected to pick up slightly through the remainder of the year, the Bank of England's (BOE) decision to hold its policy rate at 5.25% in June was described as \"finely balanced.\" The implications of the ECB and BoE easing policy ahead of the Fed has generated some concerns about the effects of policy divergence. Policy divergence may continue to weigh on the Bank of Japan (BoJ) and the yen, which has experienced consistent pressure since the BoJ's rate hike that lifted its policy rate out of negative territory. Although the BoJ was expected to pursue a gradual pace to policy tightening, the pressure on the currency-as well as the risks of 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 of 2024. Political, economic, and geopolitical risks continue to obscure the short-term outlook. In general, an environment of trend growth and near-target inflation is a good one for credit spreads. Given our base case, we expect low single-digit excess returns from a combination of slight spread compression and carry. Given that tight spreads after a strong first half set a high bar for aggressive risk-taking, we continue to favor carry, idiosyncratic stories, and relative value rather than directional views. Longer term, the fixed income outlook appears strong, on an absolute and relative basis, with ample opportunities to add value through sector rotation and issue selection in volatile markets. With market volatility still above trend, albeit less elevated, we remain modestly constructive from a fundamental standpoint. Nevertheless, valuations are full. We maintain our guardedly positive view over the medium to long term and continue to hold allocations to an array of credit sectors, including high-quality structured products (collateralized loan obligations (CLOs), commercial mortgage-backed securities (CMBS), residential mortgage-backed securities (RMBS)), high yield, and EM. With that stated, the ongoing uncertainty will generate greater dispersion in corporate results, credit spreads, and alpha relative to beta. Thus, accurate sector rotation, bottom-up credit research, and relative-value assessment should outperform indiscriminate market exposure.  Source: PGIM, Bloomberg as of 6/30/2024. Past performance is not indicative of future results. PGIM Investments ranked 3 out of 49, 13 out of 47, 10 out of 46 firms for the 1-, 5-, and 10-year periods ended 12/31/2023, respectively. See back page for methodology which takes into account Lipper rankings. PGIM Global Total Return Bond Fund (Class Z) Lipper total return ranking for the 1-, 3-, 5-, and 10-year periods as of 12/31/2023 for the Global Income Funds category were: 15/245, 208/220, 144/206, and 54/152, respectively. Lipper Funds category rankings are based on total return, do not take sales charges into account, and are calculated against all funds in each fund's respective Lipper category. Lipper total return ranking for the 1-, 3-, 5-, and 10-year periods as of 6/30/2024: 73/228, 174/217, 139/192, and 70/143, respectively. Past performance is no guarantee of future results.\nClick to enlarge 2Q 2024 Performance  The Fund outperformed its benchmark, the Bloomberg Global Aggregate Bond Index, on a gross basis. Overall security selection was the largest contributor to performance during the quarter, with selection in the EM investment grade, EM high yield, U.S. Treasuries, non-agency CMBS-and-below, AAA CLOs, non-agency mortgage-backed securities (MBS), European sovereign credit, municipals, U.S. high yield corporates, U.S. investment grade (IG) corporates, European IG corporates, GBP high yield corporates, European high yield corporates, and AA CLOs contributing most. This was partially offset by selection in U.S. sovereign credits and European bank loans, which detracted. Overall sector allocation also contributed, with overweights to the EM investment grade, EM high yield, non-agency CMBS AA-below, European bank loans, U.S. sovereign credit, and U.S. IG corporate sectors, contributing most. Within credit, selection in healthcare & pharmaceuticals, cable & satellite, municipals, consumer non-cyclicals, and foreign non-corporates contributed. Selection in media & entertainment and upstream energy detracted. During the quarter, the Fund's duration and yield curve positioning contributed to performance as the U.S. Treasury curve bear steepened. From a market perspective, having more risk, on average, over the period than the relevant benchmark also contributed to results.  Top-Down Macro Positioning Duration (Current: 6.3 yrs, Previous Quarter: 6.6 yrs) Even with the likelihood of rate cuts, long-term yields should remain centered around current levels as a fair amount of rate cuts are already priced in; and loose fiscal policy-and its resulting heavy government bond issuance-may impede any substantial, sustained decline in long rates. Our duration risk positioning remains modest, and we continue to believe that rates traverse a rather wide range. Source: PGIM. Fund U.S. Dollar Duration contribution: 2.5 years vs. Benchmark 2.7 years as of 6/30/2024. Curve Positioning  The peak in yields of September 2023 and the trough in yields seen at the turn of the year has likely established the boundaries for what will be a historically wide trading range, opening the door for tactical, alpha-generating trades across the developed market rate universe. Long-term yields are likely to remain centered around current levels, as a fair amount of rate cuts have already been priced in. On net, this will likely result in a slow normalization (i.e., dis-inversion) of the yield curve.Source: PGIM   Bottom-up Sector Positioning With yields still at respectable levels, the current backdrop is one driven not by a rapid drop in yields, but simply driven by yield itself. Source: PGIM as of 6/30/2024. Values may not sum due to rounding. Cash/Equivalents includes USD and may include Non-USD currencies. Allocations are subject to change. Bottom-up Sector Positioning (Continued)  At this stage in the credit cycle, more frequent event risks, consumers' increasing focus on essentials, and moderating credit metrics (along with increased distressed exchanges) point our allocations towards high-quality securities. That stated, we seek to add risk in situations where dislocations may mean revert and/or where sector dispersion reveals relative-value opportunities. We remain modestly constructive from a fundamental standpoint. With that stated, valuations are full. Thus, we are focused on less cyclically sensitive segments such as high-quality structured products and carry-related products. Conversely, lower-quality, highly levered entities are priced too rich relative to the potential risk. We remain overweight an array of credit sectors including both IG and high yield corporates, high-quality structured products, and EM. That said, the ongoing uncertainty will generate greater dispersion in corporate results, credit spreads, and alpha relative to beta. Thus, accurate sector rotation, bottom-up credit research, and relative-value assessment should outperform indiscriminate market exposure given the volatility to come.  Source: PGIM, Fund data as of 6/30/2024 unless otherwise noted. Values may not sum due to rounding. Allocations are subject to change. Corporate Credit Investment-Grade Corporates (Current: 24.7%, Previous Quarter 26.1%)  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, we are expecting spreads to end Q3 modestly wider than current levels. Still, there are a number of positive factors that should support the IG market. First and foremost is the underlying economic backdrop. Our base case is for moderating inflation and a reduced probability of recession. Another strength is that the technical picture in IG remains robust, with steady inflows from pension plans and insurance companies. On the supply side, year-to-date (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-funded ahead of potential volatility. Potential market risks include: emerging signs of corporate weakness, weaker consumer spending, increased merger & acquisition risk, and volatility around the U.S. elections.  High Yield Corporates (Current: 8.1%, Previous Quarter 10.3%)  We believe high yield spreads are close to fair value and we expect excess returns to come mostly from carry in Q3 2024. Longer term, we are attuned to the risks to the economy from a sustained period of high real interest rates. The technical backdrop remains supportive due, in part, to muted net new supply. Thus, we expect spreads to remain flat or to slightly tighten over the near term, with ample tail risk from risks outside of the high yield market. Due to the strength of most issuer's balance sheets, the absence of a significant maturity wall through 2024, manageable maturities in 2025 and 2026, we expect default rates to remain flat or even decline over the next 12 months.  Bank Loans (Current: 1.0%, Previous Quarter 1.0%)  U.S. bank loans continue to be supported by high all-in 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 make up the bulk of capital market activity. 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 are becoming increasingly important, and that the avoidance of defaults will be the biggest driver of alpha over the next 12-24 months.  U.S. Government Related U.S. Treasuries (Current: 1.4%, Previous Quarter 0.7%)  We believe the violent moves towards the end of 2023 have more or less defined the yield ranges we are likely to see in the quarters ahead (i.e., 3.8%-5.0%). U.S. Treasury yields continued lower following the final inflation print in Q2, which came in below estimates. U.S. Treasury yields rallied, with the 30-year yield decreasing 9 bps and 2-year yields decreasing by 12 bps. 10-year yields rallied 10 bps, ending the quarter at 4.40%. If the Fed can convey that inflation only remains above-target (in the 2.5-2.6% range) due to year-over-year comparisons, we could expect at least one Fed cut in 2024 with the mid-December appearing as the most likely meeting for that decision. Further, we believe the Fed would implement another cut in the second half of 2024 if given the opportunity.  U.S. Mortgage-Backed Securities (Current: 0.0%, Previous Quarter 0.0%)  Our positive outlook on the sector is due to a combination of factors, including current valuations, limited supply, and potential domestic bank demand as we move forward. From a general perspective, MBS would benefit if the Fed ultimately cuts rates before year-end and from further declines in implied volatility. From a technical perspective, although mortgage rates have fallen from local highs, the lack of affordable housing remains a headwind for mortgage application activity. Year-to-date MBS net supply remains tight. However, seasonal origination activity is in full swing, with bonds with loan age showing better prepayment speeds. In terms of market conditions, Fed rate has also indicated final Basel 3 capital rules will be far less restrictive than originally proposed. The recent Treasury sell-off led to some pressure on MBS durations, but that has recently improved. Looking ahead, most coupons in the MBS Index should behave more in line with expectations at these rate levels.  Non-U.S. Bonds Foreign Government Related (Current: 14.7%, Previous Quarter 12.7%)  In the Euro Area, the long-term increase in debt-service costs resulting from heavy issuance can be seen in the progression of higher government yields relative to swap rates-i.e., the swap spread. For example, Germany's relatively low debt levels have led bunds to trade at lower yields than swaps. Meanwhile, heavily-indebted credits (e.g., France and Italy) have to pay yields above swap rates due to their higher levels of indebtedness. French sovereign and quasi-governmental credit spreads widened significantly since the call for snap elections in June. As the trajectory of the politics 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. The implications of the ECB and BoE easing policy ahead of the Fed has generated some concerns about the effects of policy divergence. Policy divergence may continue to weigh on the BoJ and the yen. Although the BoJ was expected to pursue a gradual pace to policy tightening, the pressure on the currency-as well as the risks of 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 of 2024.  Emerging Markets Debt (EMD) (Current: 24.2%, Previous Quarter 22.6%)  EM debt looks attractive on a relative basis versus other comparable asset classes. Our short-term positioning is focused on factors that can outweigh the carry advantage in EM - e.g., the potential slowing of the U.S. economy, global fiscal pressures, and shifting domestic and geopolitical alliances. While retail fund flows continue to be negative across EM debt, two counterpoints add context to that sentiment: significant supply has been well absorbed, and a negative credit funding shock is unlikely if the backdrop deteriorates; and portfolio flows and foreign direct investments flows remain positive. EM credit spread performance was relatively healthy in 1H 2024, particularly the higher yielding segment. We look to preserve carry by refining select relative value exposures. EM corporates have had fewer idiosyncratic surprises this year, non-dedicated investors have shown resurgence in appetite for the asset class and while gross issuance is higher than expected, net financing likely will remain negative. Thus, EM corporate spreads have tightened and are now well through their historical average and, in some cases, have compressed close to fair value. Despite this, the outlook remains favorable given the ~7% yield on the asset class, resilient fundamentals, and negative net supply. Given the underperformance of EM local rates this year, we believe that many of the concerns are likely priced in. Broad U.S. strength, sticky service inflation, widening fiscal deficits, and recent election results have not only caused the underperformance but also interrupted monetary easing cycle in many countries. We are positioned predominantly in relative value and have a small, long U.S. dollar bias. As long as the low volatility environment and moderating growth narrative persists, we believe select high carry currencies will continue to outperform select low carry currencies. While the all-in landscape remains supportive from a top-down and bottom-up perspective across EM debt segments generally, we are cautious in light of global election outcomes and policy headwinds (i.e., tariffs, global trade, realignments, fiscal pressures).  Securitized Commercial Mortgage-Backed Securities (CMBS) (Current: 5.7%, Previous Quarter 7.0%)  Higher interest rates have led to softness in capitalization rates, which will continue to pressure valuations in 2024. However, current commercial real estate valuations better reflect the higher interest rate environment, and we are now closer to the trough in valuations. AAA conduit bonds now trade fair to comparable corporate bonds, and we prefer seasoned AAA front pay securities over AAA last cash flows given their priority in the super-senior waterfall. We continue to see value in select single-asset single-borrower securities.  Collateralized Loan Obligations (CLOs) (Current: 10.2%, Previous Quarter 10.4%) While bank loan spreads have been supported by low 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. CLO tranches continue to offer attractive relative value compared to many fixed income asset classes. 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. Non U.S. Mortgage-Backed Securities (Current: 3.5%, Previous Quarter 5.0%) Home prices continue to benefit from strong technicals as existing homeowners with low mortgage rates stay in their homes. We remain constructive on RMBS performance, particularly credit risk transfer (CRT) bonds backed by higher-quality, government-sponsored enterprise seasoned collateral, but acknowledge mortgage delinquencies have ticked up slightly in Federal Housing Administration (FHA) and non-qualifying mortgage pools-two of the lowest credit-quality segments of the mortgage market. Other ABS (Current: 1.1%, Previous Quarter 1.2%)  Prime consumer credit remains resilient, while the effects of inflation and lower disposable income continue to weigh on the weakest consumer segments and is starting to weigh on the near-prime segment. Some specialty ABS originators were caught off guard by rapidly rising rates and higher-than-expected defaults, underscoring the importance of originator/servicer due diligence. We remain positive on spreads in the near term as ABS but are mindful of heavy supply headwinds into Q3. Looking forward, we expect increased banking regulation to lead to more opportunities via asset sales or regulatory transactions (i.e., significant risk transfer).   AVERAGE ANNUAL TOTAL RETURNS % AS OF 6/30/2024  SEC Standardized Returns (with sales charges) 1-Year 3-Year 5-Year 10-Year SI Inception Date Gross Net Waiver Date   PGIM Global Total Return Z 4.83 -5.91 -1.97 0.57 3.92 3/17/1997 0.67 0.64 2/28/2025   PGIM Global Total Return A 1.37 -7.12 -2.82 - 5.54 7/7/1986 0.98 0.89 2/28/2025  \nClick to enlarge  Past performance does not guarantee future results, and current performance may be lower or higher than the past performance data quoted. The investment return and principal value will fluctuate, and shares, when sold, may be worth more or less than the original cost. For the most recent month-end performance, visit our website at pgiminvestments.com. Fund R6 returns represent Morningstar extended performance returns, which link pre-inception returns to fund's oldest share class (Class A). Maximum sales charge: Class A, 3.25%. Expenses are as of the most recent prospectus. Annualized return without sales charges describes the return to the investor before any sales charges are imposed. SEC standardized return describes the return to the investor after maximum sales charges are imposed. All returns assume share price changes, as well as the compounding effect of reinvested dividends and capital gains. Returns may reflect fee waivers and/or expense reimbursements. Without such, returns would be lower. Performance by share class may vary. Risk Information - Risks of investing in the fund include but are not limited to the following: Fixed Income investments are subject to credit, market, prepayment and interest rate risks, and their value will decline as interest rates rise. High yield (\"junk\") bonds are subject to greater credit and market risks. Foreign securities are subject to currency fluctuations and political uncertainty. Emerging market investments are subject to greater volatility and price declines. Investments in currency may result in a decline in the fund's net asset value due to changes in exchange rates. Mortgage-backed and asset-backed securities tend to increase in value less than other debt securities when interest rates decline, but are subject to a similar risk of decline in market value during periods of rising interest rates. Derivatives may carry market, credit and liquidity risks. There is no guarantee the Fund's objective will be achieved. Risks are more fully explained in the fund's prospectus. Definitions and Indices - Morningstar Intermediate Core-Plus Bond Category Average is comprised of portfolios that invest primarily in corporate and other investment-grade U.S. fixed income issues and have durations of 3.5 to six years. The Bloomberg Global Aggregate Bond Index provides a broad-based measure of the global investment-grade fixed income markets, with index components for the U.S. Aggregate, the Pan-European Aggregate, and the Asian Pacific Aggregate. This multi-currency benchmark includes Treasury, government-related, corporate and securitized fixed rate bonds from both developed and emerging markets issuers. Bloomberg U.S. Aggregate Bond Index covers the U.S.-dollar-denominated, investment-grade, fixed rate, taxable bond market of SEC-registered securities. An investment cannot be made directly in an index or an average. All indexes and averages are unmanaged. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively \"Bloomberg\"). Bloomberg or Bloomberg's licensors, own all proprietary rights in the Bloomberg Indices. Bloomberg neither approves or endorses this material or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith. Source: Morningstar. © 2024 Morningstar, Inc. All rights reserved. The information contained herein (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Class R2 shares and Class R4 shares are only offered for sale to group retirement plans available through a retirement record keeper or third-party administrator. Class R6 and Z shares may be available to group retirement plans and institutional investors through certain retirement, mutual fund wrap, and asset allocation programs. They may also be available to institutional investors. Class Z shares may be available through fee- or commission-based retail brokerage programs of certain financial intermediaries. Class A, C, and Z shares are generally closed to new retirement plans. Please see the prospectus for additional information about fees, expenses, and investor eligibility. Used with permission. ©2024 Dow Jones & Company, Inc. Source: Barron's, Feb. 29, 2024. Barron's rankings are based on asset-weighted returns in funds in five categories: U.S. Equity; World Equity; Mixed Asset; Taxable Bond; and Tax-Exempt (each a \"Barron's ranking category\"). Rankings also take into account an individual fund's performance within its Lipper peer universe. Lipper calculated each fund's net total return for the year ended Dec. 31, 2023, minus the effects of 12b-1 fees and sales charges. Each fund in the survey was given a percentile ranking, with 100 the highest and 1 the lowest in its category. That ranking measured how a fund compared with its peer \"universe,\" as tracked by Lipper, not just the funds in the survey. Individual fund scores were then multiplied by the 2023 weighting of their Barron's ranking category as determined by the entire Lipper universe of funds. Those fund scores were then totaled, creating an overall score and ranking for each fund family in the survey in each Barron's ranking category. To qualify for the ranking, firms must offer at least three active mutual funds or actively run ETFs in Lipper's general U.S. Stock category; one in World Equity; and one Mixed Asset. They also need to offer at least two taxable bond funds and one national tax-exempt bond fund. All funds must have a track record of at least one year. Consider a fund's investment objectives, risks, charges, and expenses carefully before investing. The prospectus and summary prospectus contain this and other information about the fund. Contact your financial professional for a prospectus and summary prospectus. Read them carefully before investing. Investment products are distributed by Prudential Investment Management Services LLC, member FINRA and SIPC. PGIM Investments is a registered investment advisor and investment manager to all PGIM US open-end investment companies. PGIM Fixed Income is a unit of PGIM, Inc. (PGIM), a registered investment advisor. PGIM Limited is also a subadvisor on this fund. PGIM Limited is an indirect, wholly owned subsidiary of PGIM, the principal asset management business of Prudential Financial, Inc. (PFI), a company incorporated and with its principal place of business in the United States. All are Prudential Financial affiliates. © 2024 Prudential Financial, Inc. and its related entities. PGIM, PGIM Investments, PGIM Fixed Income, PGIM Limited, and the PGIM logo are service marks of Prudential Financial, Inc. and its related entities, registered in many jurisdictions worldwide. This material is being provided for informational or educational purposes only and does not take into account the investment objectives or financial situation of any client or prospective clients. The information is not intended as investment advice and is not a recommendation. Clients seeking information regarding their particular investment needs should contact their financial professional. INVESTMENT PRODUCTS | Are not insured by the FDIC or any federal government agency | May lose value | Are not a deposit of or guaranteed by any bank or any bank affiliate 1035373-00019-00 PI5769 ID 10312024 \nClick to enlarge Original Post Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2462169498"}