Global Fixed Income Bulletin

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November 30, 2023

Whiplash!

November 30, 2023

Whiplash!

Global Fixed Income Bulletin

Whiplash!

November 30, 2023

Fixed income markets roared back with a vengeance in November. Market expectations of a soft landing rose following weaker-than-expected economic data, falling global inflation, and dovish central bank overtones. All three components led to one of the best months for fixed income returns in decades, as markets reinstated significant rate cuts in the U.S. and Europe. 10-year rates fell 60 basis points (bps) in the U.S., 36 bps in Germany, 5 bps¹ in Canada and Australia, and 67 bps in New Zealand. Emerging markets rates, broadly, fell by even more. The U.S. Dollar (USD) fell 3% versus a basket of other currencies. Within credit, U.S. investment grade corporates outperformed Euro with spreads tightening 25 bps over the month vs 13 bps. Within high yield corporates, the U.S. market again outperformed with spreads tightening 67 bps vs 47 bps. Securitized spreads also came in over the month. After a desultory year so far, U.S. Agency Mortgage-Backed Securities returned over 5% tightening significantly in spread to U.S. Treasuries. You could say goldilocks is back!

DISPLAY 1

Asset Performance Year-to-Date

Note: USD-based performance. Source: Bloomberg. Data as of November 30, 2023. The indexes are provided for illustrative purposes only and are not meant to depict the performance of a specific investment. Past performance is no guarantee of future results. See below for index definitions.

DISPLAY 2

Currency Monthly Changes versus USD

Note: Positive change means appreciation of the currency against the USD. Source: Bloomberg. Data as of November 30, 2023.

DISPLAY 3

Major Monthly Changes in 10-Year Yields and Spreads

Source: Bloomberg, JPMorgan. Data as of November 30, 2023

Fixed Income Outlook

We don’t recall ever seeing two back-to-back months like October and November. In October, yield curves were too inverted, term premia were rising, job growth was accelerating in the U.S., and central banks appeared un-yielding in maintaining that rates would have to stay high for longer. Today, forget all that! Inflation is falling, central banks are running scared of too-tight financial conditions (worried that maybe, just maybe, they over tightened). Manufacturing remains in the doldrums, with business confidence surveys all stuck below 50, suggesting contracting output. Now, no doubt the bond market sell off in Q3 and in October was spectacular, especially since data was not that strong. But certainly, it was strong enough to convince the markets that rates would not be coming down much in 2024. No more. Central bank communications from the Fed and European Central Bank (ECB) emphasized the tight financial conditions and in the case of Europe, continued weak economic growth and faster than expected falling inflation, were tight enough to forestall any future rate hikes and looked to be tight enough to get inflation down to acceptable levels. The rest, as they say, is history. Indeed, it was a November bond market for the history books. But where to from here?

While there is no doubt, in our view, that data and central bank communications were supportive of lower yields, the question now is, after the November rally, how much is left? How much of 2024 returns have been brought forward to 2023. While the Fed and ECB have supported the idea that there is a very high probability that no further rate hikes are necessary, how much can they fall in 2024 and longer term? The bi-polar bond market is now convinced that what doesn’t go up must come down--and come down a lot. While the Fed had penciled in rate cuts in 2024, they were relatively modest and only occurring in Q4 2024. The market no longer believes them. There are now over 100 bps of U.S. rate cuts expected in 2024 with a similar amount in the Eurozone. Will they occur?

Given the spectacular rally seen in November (and early December), the evolution of data and central bank communications will be key. Both the Fed and ECB have a chance in December to set the record straight. It will be very interesting to see how they characterize the current stance of monetary policy and overall financial conditions (now fully unwinding the tightening seen in September/October). In addition, while markets have celebrated the continued fall in job openings in the U.S. Bureau of Labor Statistics Job Openings and Labor Turnover Survey (JOLTS), employment growth continues to be strong. Are labor markets rolling over? Or still strong? We will have to wait and see.

Given current yields, both nominal and real, and the speed at which they fell, it seems likely that they will pause while awaiting fresh information. Markets seem very long and addicted to this very benign view of the world. Our view is that there is a lot of good news priced into government bond yield curves. We worry that the data/information flow will not be so “one way” over the rest of the month and could shake the strong optimism that not only will inflation continue to fall, it has a good chance of not being sticky and falling faster than expected. This seems to be happening already in the Eurozone but could happen in the U.S. We suggest a neutral exposure to rate risk given, for the moment, strong fundamentals, but excessive pricing for rate cuts. We, like most investors, eagerly await U.S. employment data and the outcome of the December FOMC meeting.

We continue to think selective Emerging Markets (EM) bond markets look attractive, even post-rally. The rally in U.S. Treasuries and fall in the U.S. dollar is very helpful for EM. It provides extra support for rate cuts in EM countries as inflation continues to fall. We prefer Latin American bond markets, as central banks in this region have been able to cut rates and will continue doing so if the Fed is truly on hold. But U.S. data needs to support the dovish narrative as priced by financial markets. We are reluctant to chase EM yields lower until we have a firmer grasp of the likely trajectory of U.S. Treasury yields in the months ahead.

Credit markets powered ahead in November as well. Their performance makes sense if you believe Fed/ECB rate cuts are likely and due to success combatting inflation and not because economic activity has turned out to be much weaker than expected. But one reason corporate bond spreads performed so well is that policy rates around the world are high, meaning that if data turns out weaker than expected, central banks can cut rates fairly aggressively to stem the tide, given the good inflation trajectories. This central bank “put” on the economy has not been around since the previous decade and was one of the major reasons there was no recession in the previous decade (at least in the U.S.).

Credit spreads remain well supported by policy expectations, reasonable, but not too strong growth, and high real yields, at least by historical standards. However, goldilocks does extract a price. Spreads on U.S. dollar corporate bonds are reaching levels that are on the low side, and things cannot go too wrong with the economy if they are to remain at these levels or tighten further. We think a cautious modestly long position in credit markets both in investment grade and in high yield is warranted. Shorter-maturity high yield bonds do look attractive in this environment. The outlook for inflation will be critical to know if markets need to be worried about credit spreads. Financial still look better value than non-financials.

We continue to favor shorter maturity securitized credit the most, such as Residential Mortgage-Backed Securities (RMBS), Asset Backed Securities (ABS), and selected CMBS. That said, the outlook has modestly deteriorated, as household balance sheets come under more pressure and excess household savings are run down. Our favorite category of securitized credit remains non-agency residential mortgages, despite challenging home affordability. Surprisingly, U.S. housing looks like it may have bottomed out, with prices rising once again. U.S. Agency Mortgages, despite their great November performance, still look to hold decent value versus investment grade credit.

The outlook for the U.S. dollar also appears to be changing. While very strong in Q3, it sold off significantly in November. Economic conditions in the U.S. are still better than in most other advanced economies. This suggests the Fed is unlikely to ease by more than other countries (given its 2023 performance). As such, we are not convinced that underweighting the dollar makes sense against other G-20 currencies. Some EM currencies look better positioned, but after the recent rally, we do not feel it is time to chase the market. We believe local EM yields are a better bet than EM currency appreciation.

Developed Market Rate/Foreign Currency

Monthly Review
Global bond yields rallied considerably during November. 10-year U.S. Treasuries, German Bunds, and UK Gilts fell 60 bps, 36 bps, and 34 bps respectively. After a period of consistently better than expected data in the U.S., economic figures started to be surprisingly below expectations. Most notably, there was a weaker than expected ISM Manufacturing report and softer than expected U.S. CPI. Additionally, the Treasury at the Quarterly Refunding announced more gradual increases to long-end coupon auction sizes, providing some support to a pressured long-end. In general, in contrast to recent moves, curves flattened (U.S. 2 yr/10 yr curve -20 bps). Notably, term premia, the potential driver of the prior steepening, completely reversed and may have driven the flattening. The NY Fed’s Adrian, Crump, and Moench Term Premia model for the 10-year fell 35 bps over the month. For central banks, the Fed kept policy rates the same and was seen as marginally dovish. By the end of the month, the market was no longer pricing in any chance of a FOMC hike. Elsewhere, the Bank of England, Reserve Bank of New Zealand, Riksbank, and Norges Bank opted to keep policy rates the same. The one standalone was the Reserve Bank of Australisa, which decided to hike rates 25 bps to 4.35% as expected given risks that inflation could remain elevated in Australia.¹

Outlook
With the substantial rally in global bond yields, the question now is if this is a lasting shift away from elevated rates, or if this is just a temporary move that could reverse. Critical to this question is when and by how much the Fed will cut. The market started pricing in the potential for cuts in 1Q24 and four full cuts by the end of 2024. This is despite the Fed’s communications that interest rates will have to remain elevated for a while. With that said, there has been a shift in the data, with inflation data providing greater confidence that the Fed will achieve its target, potentially without having to induce a recession. Although the economy remains somewhat resilient with expectations for 4Q GDP still positive, growth is expected to slow to below potential levels and the unemployment rate has started ticking higher. Despite the steep rally in yields, it’s unclear if the full extent of the rally is over; however, curves are now even more inverted and term premia is now well below the +1-3% levels found before the post-Global Financial Crisis period. Further, the lower yields have now loosened financial conditions. Given the uncertainty, it is difficult to concretely express an outright view on interest rates; however, we find steepeners attractive at certain parts of the curve as they would keep benefiting from further increases in term premium and/or a more typical bull steepening if the Fed pivots in the face of economic weakness. In terms of foreign exchange, with the shift in U.S. yields and data, the dollar weakened 3% during November; we are now more negative the U.S. dollar.

Emerging Market Rate/Foreign Currency

Monthly Review
Emerging Markets Debt (EMD) rebounded in November, with not only positive returns, but the best monthly returns for 2023 year-to-date across all segments of the asset class. The shift in sentiment about rate cuts next year along with dollar weakness helped move investor interest towards emerging markets. Spreads tightened for both sovereign and corporate credit, and most EM currencies strengthened. The Dominican Republic unexpectedly cut rates as the shift in the U.S. Treasury market helped create supportive macro backdrop to do so. On the other hand, Turkey surprised on the upside with a 500 bps hike, though the decision was followed with a less hawkish statement despite inflation remaining over 60%. Argentina’s new president, President Milei, was elected based on radical proposals, but the post-election rhetoric has been more positive than expected. Outflows in the asset class continued with -$1.9B for hard currency funds and -$1.0B for local currency funds but outflows significantly moderated compared to the last three months.²

Outlook
The Fed is getting closer to the end of its tightening cycle, but the distance to that finish line and the level of the terminal rate are uncertain. Divergence remains in the asset class as some EM central banks were encouraged by the dovish tone of the U.S. market and cut rates while many remain paused yet positioned to start cutting soon. The broad asset class is sensitive to macro conditions, as evidenced by the shifting sentiment in the U.S. market, so we continue to monitor these macro events and their impact on EM assets. Country and credit level analysis will be pivotal to uncover value in the asset class as we wrap up 2023.

Corporate Credit

Monthly Review
Euro Investment Grade (IG) spreads underperformed U.S. IG spreads, as November saw credit market spreads tighten and risk-free yields rally. Markets interpreted economic data and central bank comments as lower risk of further rate hikes and increasing probability of a soft-landing. Market tone in the month was driven by several factors: firstly, no further escalation in geopolitical concerns resulting in a lower oil price. Secondly, inflation data printing below expectations suggests monetary policy has worked and no further rate hikes are necessary. Thirdly, Q3 saw weakness in Energy and Chemicals relative to expectations and saw some downgrades to growth expectations. Finally, the market was supported by China headlines regarding growth and housing policy measures being planned and implemented.³

The U.S. and global high yield markets recorded near record returns in November amid slowing though relatively stable economic growth, cooling inflation readings, and a sharp drop in U.S. Treasury yields. The technical conditions in high yield were particularly strong in November, with moderate issuance and the third largest one-month inflow into U.S. high yield retail funds on record. The first several weeks of the month were characterized by sharp outperformance in the higher-quality, longer-duration segments of the high yield market. As the rally extended, investors grew more brazen and reached for additional yield, helping the CCC-rated segment to strongly outperform in the final week of November.⁴

In November, global convertibles rose dramatically along with other risk assets, on investor expectations that rates have peaked. However, convertibles underperformed (versus the MSCI Global Equity Index and Bloomberg Global Aggregate Credit) as some of the highest performing sectors such as Materials, Industrials and Financials were less represented in the convertibles market. Issuance was a bright spot as it typically is in an equity rally, with $9.6bn in new deals arriving, the second highest month of the year. Supply was led by the U.S. with $5.5bn in paper including large deals from PG&E, Uber and Western Digital.⁵

Outlook
Looking forward, our base case sees the potential for strong technicals into year-end supported by absolute demand for high quality fixed income and a headwind in Q1 as supply hits the market. We expect supply to be light in December (with the risk that some supply is pulled forward given the rally in risk free yields and credit spreads) and to be large in Q1 as issuers look to get ahead of fundamental uncertainty as well as elections in H2 in the U.S. We see carry as an attractive return opportunity.

The high yield market ended the month with an average yield that still ranked as a historically attractive yield, albeit less so relative to a month prior. However, our outlook and positioning remain somewhat cautious. The need for caution is predicated on prevailing catalysts that include restrictive monetary policy, near term headwinds facing the U.S. consumer and high yield issuers, and valuations that trade inside historical norms, the latter of which tightened sharply month-over-month.

We continue to remain constructive on the global convertible bond market. Over the course of the year, convertible bond prices have risen from the low- to mid-$80s to closer to par, which has moved them away from being more bond-like. In addition, deltas have risen, making convertible bonds more sensitive to equity movements. Conversion premiums are also much lower and more reasonable now. We believe these factors give convertible bonds a more balanced profile, which offers a more traditional asymmetric return profile going forward.

Securitized Products

Monthly Review
U.S. Agency MBS spreads tightened in November, reversing a several month trend of widening as markets continue to struggle with absorbing the supply in the absence of Fed MBS purchases and the decline of U.S. banks’ MBS purchases. Current coupon agency MBS tightened 22 bps from 177 bps to 157 bps above interpolated U.S. Treasuries. Higher coupon MBS underperformed lower coupon MBS as the curve bull flattened. The Fed’s MBS holdings shrank $16 billion to $2.44 trillion. U.S. banks’ MBS holdings remained essentially unchanged at $2.58 trillion, but bank holdings are still down over $400 billion since early 2022. Securitized credit spreads continued to tighten in November despite strong new issue supply. Our European securitized holdings were down slightly in November.⁶

Outlook
We believe that “higher rates for longer” will continue to erode household balance sheets, causing stress for consumer ABS and further stress for commercial real estate borrowers. Residential mortgage credit opportunities look more attractive to us, given that most borrowers have locked in 30-year fixed rate mortgages at substantially lower mortgage rates, and given that home price appreciation over the past few years has meaningfully increased homeowner equity. We like U.S. Agency MBS at these wider spread levels.

Securitized yields remain at historically wide levels, and we believe these wider spreads offer more than sufficient compensation for current market risks. Fundamental credit conditions remain stable despite recession risks; although delinquencies across many asset classes are increasing slowly, overall delinquencies remain low from a historically perspective, and we believe delinquency and default levels will remain non-threatening to the large majority of securities. U.S. non-agency RMBS remains our favorite credit sector despite weakened home affordability. U.S. home prices remain stable, challenged by higher mortgage costs but supported by positive supply-demand dynamics. Stable household balance sheets and employment outlook help support borrower credit, and continued conservative loan underwriting also supports the mortgage credit story. We remain more cautious of commercial real estate, especially office, which continues to be negatively impacted in the post-pandemic world. We maintain a cautious outlook on European securitized holdings.

¹ Source: Bloomberg. Data as of November 30, 2023.
² Source: Bloomberg. Data as of November 30, 2023. EM corporates represented by The JP Morgan CEMBI Broad Diversified Index.
³ Source: Bloomberg Indices: U.S Corporate Index and the European Aggregate Corporate Index. Data as of November 30, 2023.
⁴ Source: J.P. Morgan and Bloomberg US Corporate High Yield Index. Data as of November 30, 2023.
⁵ Source: Bloomberg and Refinitiv Global Convertibles Focus Index. Data as of November 30, 2023.
⁶ Source: Bloomberg. Data as of November 30, 2023.

RISK CONSIDERATIONS

Diversification neither assures a profit nor guarantees against loss in a declining market.

There is no assurance that a portfolio will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market values of securities owned by the portfolio will decline and that the value of portfolio shares may therefore be less than what you paid for them. Market values can change daily due to economic and other events (e.g., natural disasters, health crises, terrorism, conflicts, and social unrest) that affect markets, countries, companies or governments. It is difficult to predict the timing, duration, and potential adverse effects (e.g., portfolio liquidity) of events. Accordingly, you can lose money investing in a portfolio. Fixed-income securities are subject to the ability of an issuer to make timely principal and interest payments (credit risk), changes in interest rates (interest rate risk), the creditworthiness of the issuer and general market liquidity (market risk). In a rising interest-rate environment, bond prices may fall and may result in periods of volatility and increased portfolio redemptions. In a declining interest-rate environment, the portfolio may generate less income. Longer-term securities may be more sensitive to interest rate changes. Certain U.S. government securities purchased by the strategy, such as those issued by Fannie Mae and Freddie Mac, are not backed by the full faith and credit of the U.S. It is possible that these issuers will not have the funds to meet their payment obligations in the future. Public bank loans are subject to liquidity risk and the credit risks of lower-rated securities. High-yield securities (junk bonds) are lower-rated securities that may have a higher degree of credit and liquidity risk. Sovereign debt securities are subject to default risk. Mortgage- and asset-backed securities are sensitive to early prepayment risk and a higher risk of default, and may be hard to value and difficult to sell (liquidity risk). They are also subject to credit, market and interest rate risks. The currency market is highly volatile. Prices in these markets are influenced by, among other things, changing supply and demand for a particular currency; trade; fiscal, money and domestic or foreign exchange control programs and policies; and changes in domestic and foreign interest rates. Investments in foreign markets entail special risks such as currency, political, economic and market risks. The risks of investing in emerging market countries are greater than the risks generally associated with foreign investments. Derivative instruments may disproportionately increase losses and have a significant impact on performance. They also may be subject to counterparty, liquidity, valuation, and correlation and market risks. Restricted and illiquid securities may be more difficult to sell and value than publicly traded securities (liquidity risk). Due to the possibility that prepayments will alter the cash flows on collateralized mortgage obligations (CMOs), it is not possible to determine in advance their final maturity date or average life. In addition, if the collateral securing the CMOs or any third-party guarantees are insufficient to make payments, the portfolio could sustain a loss.

Fixed Income Team

Our fixed income investment capabilities are driven by seven specialized teams – Agency MBS, Broad Markets Fixed Income, Emerging Markets, Floating-Rate Loans, High Yield, Municipals, and Securitized – which span the global fixed income capital markets.

Featured Fund

Global Fixed Income Opportunities Fund

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DEFINITIONS

Basis point: One basis point = 0.01%.

INDEX DEFINITIONS

The indexes shown in this report are not meant to depict the performance of any specific investment, and the indexes shown do not include any expenses, fees or sales charges, which would lower performance. The indexes shown are unmanaged and should not be considered an investment. It is not possible to invest directly in an index.

“Bloomberg®” and the Bloomberg Index/Indices used are service marks of Bloomberg Finance L.P. and its affiliates, and have been licensed for use for certain purposes by Morgan Stanley Investment Management (MSIM). Bloomberg is not affiliated with MSIM, does not approve, endorse, review, or recommend any product, and. does not guarantee the timeliness, accurateness, or completeness of any data or information relating to any product.

The Bloomberg Euro Aggregate Corporate Index (Bloomberg Euro IG Corporate) is an index designed to reflect the performance of the euro-denominated investment-grade corporate bond market.

The Bloomberg Global Aggregate Corporate Index is the corporate component of the Bloomberg Global Aggregate index, which provides a broad-based measure of the global investment-grade fixed income markets.

The Bloomberg US Corporate High Yield Index measures the market of USD-denominated, non-investment grade, fixed-rate, taxable corporate bonds. Securities are classified as high yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below. The index excludes emerging market debt.

The Bloomberg US Corporate Index is a broad-based benchmark that measures the investment grade, fixed-rate, taxable, corporate bond market.

The Bloomberg US Mortgage Backed Securities (MBS) Index tracks agency mortgage-backed pass-through securities (both fixed-rate and hybrid ARM) guaranteed by Ginnie Mae (GNMA), Fannie Mae (FNMA) and Freddie Mac (FHLMC). The index is constructed by grouping individual TBA-deliverable MBS pools into aggregates or generics based on program, coupon and vintage. Introduced in 1985, the GNMA, FHLMC and FNMA fixed-rate indexes for 30- and 15-year securities were backdated to January 1976, May 1977 and November 1982, respectively. In April 2007, agency hybrid adjustable-rate mortgage (ARM) pass-through securities were added to the index.

Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care.

Euro vs. USD—Euro total return versus U.S. dollar.

German 10YR bonds—Germany Benchmark 10-Year Datastream Government Index; Japan 10YR government bonds —Japan Benchmark 10-Year Datastream Government Index; and 10YR US Treasury—US Benchmark 10-Year Datastream Government Index.

The ICE BofAML European Currency High-Yield Constrained Index (ICE BofAML Euro HY constrained) is designed to track the performance of euro- and British pound sterling-denominated below investment-grade corporate debt publicly issued in the eurobond, sterling

The ICE BofAML US Mortgage-Backed Securities (ICE BofAML US Mortgage Master) Index tracks the performance of US dollar-denominated, fixed-rate and hybrid residential mortgage pass-through securities publicly issued by US agencies in the US domestic market.

The ICE BofAML US High Yield Master II Constrained Index (ICE BofAML US High Yield) is a market value-weighted index of all domestic and Yankee high-yield bonds, including deferred-interest bonds and payment-in-kind securities. Its securities have maturities of one year or more and a credit rating lower than BBB-/Baa3, but are not in default.

The ISM Manufacturing Index is based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. The ISM Manufacturing Index monitors employment, production inventories, new orders and supplier deliveries. A composite diffusion index is created that monitors conditions in national manufacturing based on the data from these surveys.

Italy 10-Year Government Bonds—Italy Benchmark 10-Year Datastream Government Index.

The JP Morgan CEMBI Broad Diversified Index is a global, liquid corporate emerging markets benchmark that tracks US-denominated corporate bonds issued by emerging markets entities.

The JPMorgan Government Bond Index—emerging markets (JPM local EM debt) tracks local currency bonds issued by emerging market governments. The index is positioned as the investable benchmark that includes only those countries that are accessible by most of the international investor base (excludes China and India as of September 2013).

The JPMorgan Government Bond Index Emerging Markets (JPM External EM Debt) tracks local currency bonds issued by emerging market governments. The index is positioned as the investable benchmark that includes only those countries that are accessible by most of the international investor base (excludes China and India as of September 2013).

The JP Morgan Emerging Markets Bond Index Global (EMBI Global) tracks total returns for traded external debt instruments in the emerging markets and is an expanded version of the EMBI+. As with the EMBI+, the EMBI Global includes US dollar-denominated Brady bonds, loans and eurobonds with an outstanding face value of at least $500 million.

The JP Morgan GBI-EM Global Diversified Index is a market-capitalization weighted, liquid global benchmark for US-dollar corporate emerging market bonds representing Asia, Latin America, Europe and the Middle East/Africa.

JPY vs. USD—Japanese yen total return versus US dollar.

The Markit ITraxx Europe Index comprises 125 equally weighted credit default swaps on investment grade European corporate entities, distributed among 4 sub-indices: Financials (Senior & Subordinated), Non-Financials and HiVol.

The Nikkei 225 Index (Japan Nikkei 225) is a price-weighted index of Japan’s top 225 blue-chip companies on the Tokyo Stock Exchange.

The MSCI AC Asia ex-Japan Index (MSCI Asia ex-Japan) captures large- and mid-cap representation across two of three developed markets countries (excluding Japan) and eight emerging markets countries in Asia.

The MSCI All Country World Index (ACWI, MSCI global equities) is a free float-adjusted market capitalization weighted index designed to measure the equity market performance of developed and emerging markets. The term "free float" represents the portion of shares outstanding that are deemed to be available for purchase in the public equity markets by investors. The performance of the Index is listed in US dollars and assumes reinvestment of net dividends.

MSCI Emerging Markets Index (MSCI emerging equities) captures large- and mid-cap representation across 23 emerging markets (EM) countries.

The MSCI World Index (MSCI developed equities) captures large and mid-cap representation across 23 developed market (DM) countries.

Purchasing Managers Index (PMI) is an indicator of the economic health of the manufacturing sector.

The Refinitiv Convertible Global Focus USD Hedged Index is a market weighted index with a minimum size for inclusion of $500 million (US), 200 million (Europe), 22 billion Yen, and $275 million (Other) of Convertible Bonds with an Equity Link.

The Russell 2000® Index is an index that measures the performance of the 2,000 smallest companies in the Russell 3000 Index.

The S&P 500® Index (US S&P 500) measures the performance of the large-cap segment of the US equities market, covering approximately 75 percent of the US equities market. The index includes 500 leading companies in leading industries of the U.S. economy.

S&P CoreLogic Case-Shiller US National Home Price NSA Index seeks to measure the value of residential real estate in 20 major US metropolitan areas: Atlanta, Boston, Charlotte, Chicago, Cleveland, Dallas, Denver, Detroit, Las Vegas, Los Angeles, Miami, Minneapolis, New York, Phoenix, Portland, San Diego, San Francisco, Seattle, Tampa and Washington, D.C.

The S&P/LSTA US Leveraged Loan 100 Index (S&P/LSTA Leveraged Loan Index) is designed to reflect the performance of the largest facilities in the leveraged loan market.

The S&P GSCI Copper Index (Copper), a sub-index of the S&P GSCI, provides investors with a reliable and publicly available benchmark for investment performance in the copper commodity market.

The S&P GSCI Softs (GSCI soft commodities) Index is a sub-index of the S&P GSCI that measures the performance of only the soft commodities, weighted on a world production basis. In 2012, the S&P GSCI Softs Index included the following commodities: coffee, sugar, cocoa and cotton.

Spain 10-Year Government Bonds—Spain Benchmark 10-Year Datastream Government Index.

The Thomson Reuters Convertible Global Focus USD Hedged Index is a market weighted index with a minimum size for inclusion of $500 million (US), 200 million euro (Europe), 22 billion yen, and $275 million (Other) of convertible bonds with an equity link.

U.K. 10YR government bonds—U.K. Benchmark 10-Year Datastream Government Index. For the following Datastream government bond indexes, benchmark indexes are based on single bonds. The bond chosen for each series is the most representative bond available for the given maturity band at each point in time. Benchmarks are selected according to the accepted conventions within each market. Generally, the benchmark bond is the latest issue within the given maturity band; consideration is also given to yield, liquidity, issue size and coupon.

The US Dollar Index (DXY) is an index of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of US trade partners’ currencies.

The Chicago Board Options Exchange (CBOE) Market Volatility (VIX) Index shows the market’s expectation of 30-day volatility.

There is no guarantee that any investment strategy will work under all market conditions, and each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market.

A separately managed account may not be appropriate for all investors. Separate accounts managed according to the particular strategy may include securities that may not necessarily track the performance of a particular index. Please consider the investment objectives, risks and fees of the Strategy carefully before investing. A minimum asset level is required. For important information about the investment managers, please refer to Form ADV Part 2.

The views and opinions and/or analysis expressed are those of the author or the investment team as of the date of preparation of this material and are subject to change at any time without notice due to market or economic conditions and may not necessarily come to pass. Furthermore, the views will not be updated or otherwise revised to reflect information that subsequently becomes available or circumstances existing, or changes occurring, after the date of publication. The views expressed do not reflect the opinions of all investment personnel at Morgan Stanley Investment Management (MSIM) and its subsidiaries and affiliates (collectively “the Firm”) and may not be reflected in all the strategies and products that the Firm offers.

Forecasts and/or estimates provided herein are subject to change and may not actually come to pass. Information regarding expected market returns and market outlooks is based on the research, analysis and opinions of the authors or the investment team. These conclusions are speculative in nature, may not come to pass and are not intended to predict the future performance of any specific strategy or product the Firm offers. Future results may differ significantly depending on factors such as changes in securities or financial markets or general economic conditions.

This material has been prepared on the basis of publicly available information, internally developed data and other third-party sources believed to be reliable. However, no assurances are provided regarding the reliability of such information and the Firm has not sought to independently verify information taken from public and third-party sources.

This material is a general communication, which is not impartial and all information provided has been prepared solely for informational and educational purposes and does not constitute an offer or a recommendation to buy or sell any particular security or to adopt any specific investment strategy. The information herein has not been based on a consideration of any individual investor circumstances and is not investment advice, nor should it be construed in any way as tax, accounting, legal or regulatory advice. To that end, investors should seek independent legal and financial advice, including advice as to tax consequences, before making any investment decision.

Charts and graphs provided herein are for illustrative purposes only. Past performance is no guarantee of future results.

The indexes are unmanaged and do not include any expenses, fees or sales charges. It is not possible to invest directly in an index. Any index referred to herein is the intellectual property (including registered trademarks) of the applicable licensor. Any product based on an index is in no way sponsored, endorsed, sold or promoted by the applicable licensor and it shall not have any liability with respect thereto.

This material is not a product of Morgan Stanley’s Research Department and should not be regarded as a research material or a recommendation.

The Firm has not authorised financial intermediaries to use and to distribute this material, unless such use and distribution is made in accordance with applicable law and regulation. Additionally, financial intermediaries are required to satisfy themselves that the information in this material is appropriate for any person to whom they provide this material in view of that person’s circumstances and purpose. The Firm shall not be liable for, and accepts no liability for, the use or misuse of this material by any such financial intermediary.

This material may be translated into other languages. Where such a translation is made this English version remains definitive. If there are any discrepancies between the English version and any version of this material in another language, the English version shall prevail.

The whole or any part of this material may not be directly or indirectly reproduced, copied, modified, used to create a derivative work, performed, displayed, published, posted, licensed, framed, distributed or transmitted or any of its contents disclosed to third parties without the Firm’s express written consent. This material may not be linked to unless such hyperlink is for personal and non-commercial use. All information contained herein is proprietary and is protected under copyright and other applicable law.

Eaton Vance is part of Morgan Stanley Investment Management. Morgan Stanley Investment Management is the asset management division of Morgan Stanley.

DISTRIBUTION

This material is only intended for and will only be distributed to persons resident in jurisdictions where such distribution or availability would not be contrary to local laws or regulations.

MSIM, the asset management division of Morgan Stanley (NYSE: MS), and its affiliates have arrangements in place to market each other’s products and services. Each MSIM affiliate is regulated as appropriate in the jurisdiction it operates. MSIM’s affiliates are: Eaton Vance Management (International) Limited, Eaton Vance Advisers International Ltd, Calvert Research and Management, Eaton Vance Management, Parametric Portfolio Associates LLC and Atlanta Capital Management LLC.

This material has been issued by any one or more of the following entities:

EMEA:

This material is for Professional Clients/Accredited Investors only.

In the EU, MSIM and Eaton Vance materials are issued by MSIM Fund Management (Ireland) Limited (“FMIL”). FMIL is regulated by the Central Bank of Ireland and is incorporated in Ireland as a private company limited by shares with company registration number 616661 and has its registered address at 24-26 City Quay, Dublin 2, D02 NY 19, Ireland.

Outside the EU, MSIM materials are issued by Morgan Stanley Investment Management Limited (MSIM Ltd) is authorised and regulated by the Financial Conduct Authority. Registered in England. Registered No. 1981121. Registered Ofﬁce: 25 Cabot Square, Canary Wharf, London E14 4QA.

In Switzerland, MSIM materials are issued by Morgan Stanley & Co. International plc, London (Zurich Branch) Authorised and regulated by the Eidgenössische Finanzmarktaufsicht ("FINMA"). Registered Office: Beethovenstrasse 33, 8002 Zurich, Switzerland.

Outside the US and EU, Eaton Vance materials are issued by Eaton Vance Management (International) Limited (“EVMI”) 125 Old Broad Street, London, EC2N 1AR, UK, which is authorised and regulated in the United Kingdom by the Financial Conduct Authority.

Italy: MSIM FMIL (Milan Branch), (Sede Secondaria di Milano) Palazzo Serbelloni Corso Venezia, 16 20121 Milano, Italy. The Netherlands: MSIM FMIL (Amsterdam Branch), Rembrandt Tower, 11th Floor Amstelplein 1 1096HA, Netherlands. France: MSIM FMIL (Paris Branch), 61 rue de Monceau 75008 Paris, France. Spain: MSIM FMIL (Madrid Branch), Calle Serrano 55, 28006, Madrid, Spain. Germany: Germany: MSIM FMIL (Frankfurt Branch), Grosse Gallusstrasse 18, 60312 Frankfurt am Main, Germany (Gattung: Zweigniederlassung (FDI) gem. § 53b KWG). Denmark: MSIM FMIL (Copenhagen Branch), Gorrissen Federspiel, Axel Towers, Axeltorv2, 1609 Copenhagen V, Denmark.

MIDDLE EAST

Dubai: MSIM Ltd (Representative Office, Unit Precinct 3-7th Floor-Unit 701 and 702, Level 7, Gate Precinct Building 3, Dubai International Financial Centre, Dubai, 506501, United Arab Emirates. Telephone: +97 (0)14 709 7158). This document is distributed in the Dubai International Financial Centre by Morgan Stanley Investment Management Limited (Representative Office), an entity regulated by the Dubai Financial Services Authority (“DFSA”). It is intended for use by professional clients and market counterparties only. This document is not intended for distribution to retail clients, and retail clients should not act upon the information contained in this document.

This document relates to a financial product which is not subject to any form of regulation or approval by the DFSA. The DFSA has no responsibility for reviewing or verifying any documents in connection with this financial product. Accordingly, the DFSA has not approved this document or any other associated documents nor taken any steps to verify the information set out in this document, and has no responsibility for it. The financial product to which this document relates may be illiquid and/or subject to restrictions on its resale or transfer. Prospective purchasers should conduct their own due diligence on the financial product. If you do not understand the contents of this document, you should consult an authorised financial adviser.

NOT FDIC INSURED | OFFER NO BANK GUARANTEE | MAY LOSE VALUE | NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY | NOT A DEPOSIT

Latin America (Brazil, Chile Colombia, Mexico, Peru, and Uruguay)

This material is for use with an institutional investor or a qualified investor only. All information contained herein is confidential and is for the exclusive use and review of the intended addressee, and may not be passed on to any third party. This material is provided for informational purposes only and does not constitute a public offering, solicitation or recommendation to buy or sell for any product, service, security and/or strategy. A decision to invest should only be made after reading the strategy documentation and conducting in-depth and independent due diligence.

ASIA PACIFIC

Hong Kong: This material is disseminated by Morgan Stanley Asia Limited for use in Hong Kong and shall only be made available to “professional investors” as defined under the Securities and Futures Ordinance of Hong Kong (Cap 571). The contents of this material have not been reviewed nor approved by any regulatory authority including the Securities and Futures Commission in Hong Kong. Accordingly, save where an exemption is available under the relevant law, this material shall not be issued, circulated, distributed, directed at, or made available to, the public in Hong Kong. Singapore: This material is disseminated by Morgan Stanley Investment Management Company and may not be circulated or distributed, whether directly or indirectly, to persons in Singapore other than to (i) an accredited investor (ii) an expert investor or (iii) an institutional investor as defined in Section 4A of the Securities and Futures Act, Chapter 289 of Singapore (“SFA”); or (iv) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA. This publication has not been reviewed by the Monetary Authority of Singapore. Australia: This material is provided by Morgan Stanley Investment Management (Australia) Pty Ltd ABN 22122040037, AFSL No. 314182 and its affiliates and does not constitute an offer of interests. Morgan Stanley Investment Management (Australia) Pty Limited arranges for MSIM affiliates to provide financial services to Australian wholesale clients. Interests will only be offered in circumstances under which no disclosure is required under the Corporations Act 2001 (Cth) (the “Corporations Act”). Any offer of interests will not purport to be an offer of interests in circumstances under which disclosure is required under the Corporations Act and will only be made to persons who qualify as a “wholesale client” (as defined in the Corporations Act). This material will not be lodged with the Australian Securities and Investments Commission.

Japan:
For professional investors, this document is circulated or distributed for informational purposes only. For those who are not professional investors, this document is provided in relation to Morgan Stanley Investment Management (Japan) Co., Ltd. (“MSIMJ”)’s business with respect to discretionary investment management agreements (“IMA”) and investment advisory agreements (“IAA”). This is not for the purpose of a recommendation or solicitation of transactions or offers any particular financial instruments. Under an IMA, with respect to management of assets of a client, the client prescribes basic management policies in advance and commissions MSIMJ to make all investment decisions based on an analysis of the value, etc. of the securities, and MSIMJ accepts such commission. The client shall delegate to MSIMJ the authorities necessary for making investment. MSIMJ exercises the delegated authorities based on investment decisions of MSIMJ, and the client shall not make individual instructions. All investment profits and losses belong to the clients; principal is not guaranteed. Please consider the investment objectives and nature of risks before investing. As an investment advisory fee for an IAA or an IMA, the amount of assets subject to the contract multiplied by a certain rate (the upper limit is 2.20% per annum (including tax)) shall be incurred in proportion to the contract period. For some strategies, a contingency fee may be incurred in addition to the fee mentioned above. Indirect charges also may be incurred, such as brokerage commissions for incorporated securities. Since these charges and expenses are different depending on a contract and other factors, MSIMJ cannot present the rates, upper limits, etc. in advance. All clients should read the Documents Provided Prior to the Conclusion of a Contract carefully before executing an agreement. This document is disseminated in Japan by MSIMJ, Registered No. 410 (Director of Kanto Local Finance Bureau (Financial Instruments Firms)), Membership: The Japan Securities Dealers Association, the Investment Trusts Association, Japan, the Japan Investment Advisers Association and the Type II Financial Instruments Firms Association.