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gennaio 17, 2025

Is 2025 (finally) the Year of the Bond?

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gennaio 17, 2025

Is 2025 (finally) the Year of the Bond?


Global Fixed Income Bulletin

Is 2025 (finally) the Year of the Bond?

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gennaio 17, 2025

 
 

December proved to be an eventful month in the bond market, influenced heavily by a hawkish Federal Reserve (Fed) meeting and persistent global inflation trends that underwhelmed expectations. Global government bond yields experienced notable increases across both developed and emerging markets. In the U.S., the 10-year Treasury yield rose by 40 basis points (bps), contributing to a significant steepening of the yield curve with the 2s/10s spread (the difference between 2- and 10-year yields) widening by 31 bps.1 In Europe, the trend was similar, with Germany’s 10-year yield climbing 28 bps, while the U.K. yield saw an increase of 33 bps. Emerging markets also felt the impact, with Mexico’s yields rising by 42 bps and Brazil experiencing a substantial jump of 175 bps. China and Thailand were two of the only countries that saw their 10-year yield decline over the month with yields falling by 36 bps in China and 4 bps in Thailand.

The U.S. dollar strengthened throughout the month, gaining 2.6% against a basket of other currencies.2 Notably, it outperformed the New Zealand dollar by 5.4%, the Australian dollar by 5%, and the Japanese yen by 4.7%.

Regarding spread sectors, the U.S. corporate market saw a 21 bps widening in high yield spreads and a slight increase of 2 bps in investment grade spreads. Conversely, European high yield spreads tightened by 22 bps, while investment grade corporate spreads narrowed by 6 bps.3 Meanwhile, securitized credit spreads remained mostly stable. Agency mortgage-backed spreads experienced marginal tightening.

Overall, December highlighted significant volatility and adjustments in both the bond and currency markets, setting the stage for further developments in the new year.

 
 
DISPLAY 1
 
Asset Performance Year-to-Date
 

Note: USD-based performance. Source: Bloomberg. Data as of December 31, 2024. 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.

 
 
DISPLAY 2
 
Currency Monthly Changes vs. USD (+ = appreciation)
 

Note: Positive change means appreciation of the currency against the USD. Source: Bloomberg. Data as December 31, 2024.

 
 
DISPLAY 3
 
Major Monthly Changes in 10-Year Yields and Spreads
 

Source: Bloomberg, JPMorgan. Data as of December 31, 2024.

 
 

Fixed Income Outlook
Bond market volatility returned in December, with yields rising worldwide. Moreover, credit spreads widened as well, albeit less aggressively than yields. All was not completely lost, as securitized credit spreads tightened modestly. At the extreme end, Brazilian yields were up well over 100 bps in December alone as the central bank hiked its policy rate 100 bps. December’s poor performance weighed significantly on 2024 returns overall. For the year, the U.S. aggregate bond index returned 1.25% while the global aggregate bond index (hedged to U.S. dollars) returned 3.4%, both significantly underperforming cash and underperforming expectations. High yield corporate debt bucked the trend as returns comfortably exceeded cash.4

This result is highly unusual given that developed market central banks began their long-awaited easing cycles. In fact, since the Fed began to lower interest rates in September, 10-year U.S. Treasury yields have risen to just under 90 bps. Of course, what happened is that economic data once again proved unfriendly just as the Fed became more optimistic about inflation and pessimistic about growth and unemployment. Indeed, the U.S. unemployment rate peaked as the Fed began to cut interest rates. Bad luck or bad analysis/forecasting? The answer is important as it portends what may lie ahead.

Prognostications for 2025 are likely to be challenging to hold with confidence. The last five years have been replete with surprises. First was 2020, when the pandemic changed everything by the end of the first quarter; 2021 saw an inflation surge few had forecast; then “transitory” inflation turned out to be anything but, causing 2022 to introduce the most aggressive tightening cycle in decades; 2023 brought on recession worries/forecasts, which also proved to be not just off the mark but the diametric opposite to what actually happened; and 2024 delivered continued good news on the economy, with no slowdown in U.S. growth and spectacular U.S. equity returns. So, what can we expect for 2025?

The big day is 20 January, President-elect Trump’s inauguration. He has promised a slew of decisions on the first day of office. While we do not know the extent of his actions, we do know his policy agenda, whether implemented on day one through executive orders or over the course of 2025 through legislative action. We have already seen Trump’s social media posts regarding tariffs on China, Canada and Mexico. It is still unknown to what extent deals will be struck with these countries or with the rest of the world. So, uncertainty reigns on this front. How this plays out is likely to be important for the evolution of economies and potentially monetary policy. Fed Chairman Powell alluded to such in his December press conference where he stated that some Federal Open Market Committee members were already incorporating their views on the economic impact of potential Trump policies into their monetary policy outlooks.

What about monetary policy? The outlook for growth and inflation are key. Most developed market central banks began cutting interest rates in 2024, with the Fed and European Central Bank (ECB) each cutting rates 100bp on the back of lower inflation. Moreover, they have signalled further rate cuts in 2025. But a major complicating factor for both the Fed and ECB is that inflation remains above target, improvements have been spotty in the last few months and increased price pressures are likely to be in the pipeline, not least coming from higher tariff threats. Last year, the market proved too dovish about rate cuts. Will 2025 be different? Market and central bank forecasts are much more in line now than they have been in recent years, so that is something. But given the likely recovery in non-U.S. global economic growth and the ongoing resilience of the U.S. economy (led by a vibrant household sector and increasingly confident corporate sector), the outlook for rate cuts is uncertain. Importantly, is monetary policy tight? The performance of equities, house prices and resiliency of growth and inflation would suggest not. Moreover, we know that there will be changes to U.S. trade/fiscal/immigration/regulatory policies in 2025. We just do not know how extensive and how much other countries will retaliate. This further muddies the water when it comes to predicting rate cuts around the world in 2025.

It is distinctly possible that current levels of developed market yields around the world are close to fair value. If the Fed and ECB do not cut rates at least 50 bps more in 2025, it is difficult for bonds to rally. With fiscal policy likely to remain loose around the world and inflation sticky (even if continuing to drift lower), the term premium on bonds could continue to rise. Indeed, one of the major contributing factors to higher bond yields in December was the rise in risk premiums on longer-maturity government bonds. However, risk premiums are still below long-term averages and are still likely to move higher — the timing and extent of which remain distinctly uncertain. It is very possible that U.S. Treasury yields remain in a broad 4%-5% range in 2025, which, if it did happen, would be a big positive after 2024’s mediocre performance.

Other developed country bond markets look better positioned than the U.S. Treasury market, but that is faint praise as many issues facing the U.S. are also present in other countries. Indeed, German and Canadian government bonds have performed very well in 2024 with respect to U.S. Treasurys. We are more optimistic that these markets will likely be better supported in 2025. The U.K. gilt market remains interesting to us, as it appears to have similar growth (low) prospects as the eurozone but with yields and policy rates closer to those in the U.S. This may present an opportunity in 2025. Will 2025 finally be the year for strong bond returns (outside of high yield)?

As a starting point, longer-maturity U.S. Treasury yields are higher now than they were at the beginning of 2024. And, if yields do drift higher, the extra starting yield will offset some of that. We remain hopeful that bonds can beat cash in 2025, but this will require central banks to continue to cut interest rates. This looks likely but, and it is an important but, recent trends in growth and inflation (and Trumpian policy implementation) have increased the probability of rates not being cut in 2025. On the other hand, we believe bond returns are likely to be stronger in absolute terms compared to 2024, at least for investment grade. With the yield on the U.S. high yield index hovering around 7%, the potential to generate 8%-plus returns in 2025 will be challenging, although far from impossible. When all is said and done, we believe being long duration risk in portfolios still does not look overly appealing. While markets are in a better place than in 2024 with regard to expectations on monetary policy and the economy (no recession priced; no material increases in unemployment rates expected; better growth outside of the U.S. beginning; and continued Chinese economic stimulus), upside surprises to growth and inflation are still possible.

Credit markets are likely to continue to perform well. Absolute yields, solid U.S. economic data, strong corporate fundamentals, central bank policy support and expectations of more easing are supportive of the sector. Trump/Republican party policies (deregulation/tax cuts) should be also helpful. However, the longer-term impact of Republican policies is less clear. Greater opportunities and more regulatory leeway typically led to riskier behaviour and greater leverage, which is not usually positive for creditors. With credit spreads on the tighter side (expensive by historical standards but not overvalued), it will be difficult to significantly outperform. We are more confident on absolute performance than relative to other sectors or asset classes. Combining fundamentals/technicals and valuation, a very selective strategy seems appropriate. We remain focused on avoiding companies and industries at risk (either from idiosyncratic underperformance, secular challenges or from increased management aggressiveness) while building as much yield as is reasonable into the portfolio without jeopardizing returns from credit losses or spread widening and without taking undue risks. Given current spread levels, it is challenging to be confident that spreads can tighten meaningfully further from here, although it’s not impossible, as fundamentals at both the macro and sector levels remain strong. We still identify better opportunities in U.S. names and European banks in euro-denominated bonds.

At risk of sounding like a broken record, we continue to find the best opportunities in securitized credit, both in agency and non-agency securities. Amid the current noise and uncertainty in the world, we believe this sector can continue to perform well. U.S. households with prime credit ratings maintain strong balance sheets, which should continue to support consumer credit and ancillary structures, especially as housing prices remain firm and the unemployment rate stays low. Changes in U.S. tax policy should also be supportive. In the agency sector, higher coupon securities continue to be attractive compared to investment grade corporates and other agency coupon structures, and we believe they are likely to outperform U.S. Treasury securities. Selective asset-backed securities (ABS) and commercial mortgage-backed securities (CMBS) also remain attractive, though it is prudent to be highly selective when investing in commercial office-backed securities.

Emerging market (EM) bonds are likely to remain unloved during the early stages of the Trump-led Republican government. Stronger U.S. growth, combined with higher interest rates for a longer period and weaker global trade linkages, are not typically conducive to strong EM performance. Nevertheless, we believe that countries with solid economic outlooks, decent growth, falling inflation, high real yields and central banks willing and able to cut interest rates—despite policy changes in the U.S.—are likely to perform well. Country and security selection remain critical. We continue to avoid Brazilian bonds as fiscal and monetary risks remain unresolved. Indeed, the Brazilian central bank has been resolutely hawkish in hiking interest rates but to no avail so far. At some point in 2025, we believe Brazilian local bonds are likely to be more attractive. We think some of the higher-yielding countries with weaker trade linkages to the U.S., like Egypt, are likely to perform relatively better.

In currency markets, the dollar remains firm, and this is unlikely to change near term. While the dollar appears stretched compared to its historical levels, its fundamental support remains robust and most other currencies around the world look significantly more challenged. Easier fiscal policy, tighter monetary policy (relative to prior expectations), trade wars and stronger U.S. growth all bode well for the dollar. However, one caveat to this optimistic narrative could be a deterioration in the U.S. labour market. This would incentivize the Fed to become more aggressive in cutting interest rates given its dual mandate. Otherwise, the U.S. economy continues to excel in terms of growth, productivity, profit results and yield levels. It will be challenging for other countries to generate the kind of fundamental support that the U.S. dollar enjoys, especially with a Republican administration focused on implementing a higher tariff strategy. It seems likely that something needs to go wrong on the U.S. side to cause the dollar to fall. But, with tariffs imminent, this is difficult to see. We believe avoiding underweight U.S. dollar positions versus other developed market currencies makes sense. That said, we also believe more idiosyncratic positions in selective EM currencies do have merit—selectivity being the key word.

Developed Market Rate/Foreign Currency

Monthly Review
Developed market (DM) interest rates rose in December, and yield curves continued to steepen, in spite of inflation and labour market data printing largely in line with expectations. The reason for the sell-off was a more hawkish FOMC meeting than the market was expecting, despite delivering on a widely expected 25 bps cut. Official estimates of the rate path and long-run neutral rate were revised significantly higher in the Summary of Economic Projections, and Chairman Powell reinforced the more hawkish message at the press conference. Longer-maturity bonds underperformed short-maturity bonds as term premium also expanded.

In the euro area, economic data showed some signs of stabilisation after the deterioration observed in November. While sentiment in German and French manufacturing continued to worsen, the euro area services PMI returned to expansion territory. The European Central Bank (ECB) reduced its policy rate by a further 25 bps at its December meeting, with communication suggesting a perception of further downside risks to growth.

In foreign exchange markets, the U.S. dollar continued to appreciate against all other G10 currencies in December, as stronger U.S. growth and Fed hawkishness led to a further widening in rate differentials between the U.S. and global peers. The dollar index reached levels not seen since 2022 as markets began to also consider the outlook for global trade under the incoming Trump administration. The Antipodean currencies traded the most poorly, along with the Japanese yen, which weakened due to the Bank of Japan being more dovish than expected at its December meeting.

Outlook
We are neutral on duration in DM markets overall, aside from Japan, and retain curve steepening exposures, particularly in the U.S. Cross-market. We remain underweight U.S. duration vs the U.K. and New Zealand. While Fed expectations and UST valuations seem more reasonable after the recent sell-off, U.S. economic growth remains robust, and inflationary pressures – particularly in services sectors – remain elevated. We remain underweight JGBs, and long Japanese inflation breakevens, given we think Japanese inflation is moving structurally higher and will result in the BoJ raising interest rates higher than the market currently prices. We remain positive on the Australian dollar and U.S. dollar versus the Canadian dollar, and also favour the yen over the euro.

Emerging Market Rate/Foreign Currency             

Monthly Review
Performance was disappointing for EMD markets as EM currencies broadly sold off and sovereign and corporate credit were negatively impacted by the rise in U.S. Treasury yields for the month. The U.S. Presidential election was top of mind for global investors. Following the Fed’s first rate cut of this cycle in September, October was marked with uncertainty in anticipation of the election – U.S. Treasury yields increased and the dollar strengthened. The market responded to the Trump election victory with increased volatility and, although it cut rates at its December meeting, the Fed’s less dovish tone coming out of the meeting grabbed investors’ attention and rates continued to rise along with the U.S. dollar. In the Middle East, geopolitical uncertainty increased as the Assad regime in Syria fell after four decades of ruling. The fall of the regime was partially a consequence of a weaker Iran. Alliances and centers of power in the region have the potential to shift also due to the ongoing war in the region. South Korea President Yoon Suk Yeol briefly imposed martial law to “protect the country from anti-state forces,” and likely as a result of the President’s political troubles and lack of influence after the opposition won the general election earlier this year. Yoon and acting President Han Duck-soo were both impeached by Parliament creating political ambiguity, but the Constitutional Court still must determine if impeachment is legal.

Performance for the underlying EMD risk factors was negative. The EM corporate index was down the least as spreads compressed, but the rise in U.S. Treasury yields dominated performance. The USD-denominated EMD sovereign index also saw spreads compress, to a lesser degree than corporates, but U.S. Treasury yields were a similar drag on performance. Finally, the local segment of the asset class suffered most as currencies sold off and local rates rose, albeit less than U.S. Treasury yields. Outflows continued with approximately -$15.8 billion net going out of dedicated-EMD funds globally during the quarter with -$11.6 billion from hard currency funds and -$4.2 billion from local currency funds.

Outlook
The U.S. Fed cut rates at its December meeting which was largely expected. However, the shift in tone and outlook for future cuts in 2025 turned more restrictive than it was just a few months ago. EM central banks will continue to watch the actions of the Fed as they navigate future rate cuts. Real yields differential widened between EM and DM as the number of rate cuts moderated across emerging markets, but developed markets continued on their cutting cycle. Emerging markets inflation continued to come down, although at a slower rate, and the market stays cautious in anticipation of global policies that could trigger an uptick in inflation. While U.S. politics are often not directly related to emerging markets, policies can have spillover effects. As the next administration comes into office, foreign policy and trade policy will begin to take shape – we will monitor how this may impact countries at an individual level. Geopolitical tensions increased during the quarter. The fall of the Assad regime along with the conflict that has expanded beyond Israel and Hamas may open the potential for a shift in the centers of influence and shift in alliances in the region. Given the uncertain macro backdrop, we continue to place an emphasis on differentiation amongst countries and credits in order to uncover value.

Corporate Credit

Monthly Review
December saw European investment grade credit spreads tighten, driven by strong technicals, while government bond yields moved higher. Both the ECB and the Fed cut interest rates by 25 bps, with the ECB lowering rates to support economic growth, and the Fed signalling a more cautious approach. Separately in France, the government of Michel Barnier fell, with the first successful no-confidence vote since 1962. During what was a quiet month for corporate news flow, rumours of a merger between Honda and Nissan surfaced, leading to substantial tightening in Nissan’s credit spreads. Meanwhile, the publication OFWAT’s ‘Final Determinations’ was seen as broadly positive for the struggling UK water sector. Primary issuance was seasonally light and came in the middle of the expected range at EUR 5bn. Inflows into the asset class continued at a strong pace with investors continuing to reach for the “all-in” yield offered by IG credit.

Performance in the U.S. and global high yield markets weakened in December amid modestly wider spreads and sharply higher U.S. Treasury yields. The increase in base rates coupled with wider spreads left the average yield in U.S. high yield at a four-month high at year-end.5 The lowest quality segments again generally outperformed for the one-month period, while the higher quality, longer duration BB-segment underperformed as U.S. Treasury yields rose. Finally, December was an active month for default and distressed exchange activity in leveraged credit; however, most of the volume was attributable to a single mass media provider.

Global convertible bonds sold off with other risk assets in December. The Federal Reserve’s December reduction in short-term rates was fully anticipated; however, commentary regarding a more cautious path forward was viewed as hawkish, which caused U.S. equity markets to sell off and U.S. treasury yields to climb. Ultimately, global convertible bonds outperformed global equities and bonds during the month. New issuance was strong again in December, with the U.S. accounting for a large majority of new paper during the month. The asset class also continued to see crypto-related issuers come to market again during the month. In total, $12.0 billion priced in December, bringing total issuance in 2024 to $119 billion.

Outlook
Looking forward our base case remains constructive for credit supported by expectations of a “soft landing”, fiscal policy that remains supportive of growth/employment/consumption, and strong corporate fundamentals. This is additionally supported by a generally low risk corporate strategy. Manageable net issuance coupled with strong demand for the “all-in” yield offered by IG credit is expected to create a supportive technical dynamic. When looking at credit spreads, we view the market as offering some value but see carry as the main driver of return, with additional gains coming from sector and, increasingly, security selection. Given the uncertain medium term fundamental backdrop, we have less confidence in material spread tightening.

We enter 2025 with a relatively balanced view for the high yield market. This outlook includes the expectation for episodic volatility, and the sober realization that, while yields remain historically attractive, on a spread-basis the high yield market is priced nearly to perfection. We come to this conclusion after a thorough analysis of factors including the evolving monetary policy of global central banks, U.S. and global economic growth, consumer health, the fundamentals of high yield issuers, technical conditions, and valuations. Ultimately, we believe that, on average, the yield provides attractive compensation for the underlying credit risk, but reaching for risk in lower-rated credits will be punitively rewarded.

We remain constructive on the global convertible bond market as we enter 2025. Technicals are strong, as convertible bonds have maintained a balanced profile, interest rates remain relatively high, equity valuations increased in 2024, and corporations continue to have financing needs. New convertible bond issuance was strong in 2024 and we expect that to continue as global central banks continue to modestly cut interest rates and bonds issued during the Covid-19 pandemic mature. Finally, volatility should pick up in the new year as geopolitical tensions and regional tensions remain present and markets digest the policies of the incoming Trump administration.

Securitized Products

Monthly Review
In December, U.S. agency MBS spreads tightened by 3 bps and are now approximately 4 bps wider year-to-date at +135 bsp compared to U.S. Treasuries. Given the significant tightening in other credit sectors, agency MBS continues to be one of the few areas in fixed income with attractive valuations. The Fed’s MBS holdings shrank by $3.5 billion in December to $2.237 trillion and are now down $459 billion from its peak in 2022. After a prolonged period of monthly increases, U.S. banks’ MBS holdings fell slightly by $7 billion to $2.643 trillion in December; bank MBS holdings are still down roughly $329 billion since early 2022. Securitized credit spreads were little changed in December. Securitized issuance remained slow in December, as the holiday season continued, with many issuers opting to enter the market before the election; this supply was well absorbed and met with strong demand. Year-to-date, securitized credit has outperformed most other sectors of comparable credit quality due to its high cash flow carry and lower interest rate duration.

Outlook
We expect U.S. agency MBS spreads to tighten as flows from cash and cash alternatives should move to the attractive return profile of this sector. We also expect securitized credit spreads to tighten in line with agency MBS spreads. Securitized credit sectors were among the best performing sectors in 2024, and we expect this to continue into 2025. We believe that returns will result primarily from cashflow carry in the coming months as we enter the year with higher yields, but will also get an added boost from tighter spreads due to increased demand. We still believe that current rate levels remain stressful for many borrowers and will continue to erode household balance sheets, causing stress for some consumer ABS, particularly involving lower income borrowers. Commercial real estate also remains challenged by current financing rates. Residential mortgage credit opportunities remain our favorite sector and is the one sector where we remain comfortable going down the credit spectrum, as we remain more cautious regarding lower rated ABS and CMBS. We remain positive on Agency MBS valuations as they remain attractive versus investment-grade corporate spreads and versus historical agency MBS spreads.

 
 

1 Source for all global government bond yields: Bloomberg L.P. Data as of 31 December 2024.
2 Source for currency data: Bloomberg L.P. Data as of 31 December 2024.
3 Source: Bloomberg L.P. Data as of 31 December 2024.
4 Source: Bloomberg, as of 12/31/2024.
5 Source: Morgan Stanley Investment Managment, ICE Data Indices. Data as of 1/2/2025).

 
 
 
The Broad Markets Fixed Income team unites the expertise of single-sector research and trading teams across the Morgan Stanley Investment Management fixed income platform to identify what they believe are the best opportunities in fixed income.
 
 
 
 
 

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.

DEFINITIONS

Basis point (bp): 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 authorized 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 authorized financial adviser.

US

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.

 

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