Morgan Stanley IM: April Showers Bring May… Rallies?

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Risk assets continued their recovery throughout the month, driven by a de-escalation in the trade war between the U.S. and China, coupled with generally subdued volatility throughout the period.

Developed market government bond yields were broadly higher over the month as a result of the general risk-on sentiment. 10-year yields climbed by 24 basis points (bps) in the U.S., 18 bps in Japan, 21 bps in the UK, and 6 bps in Germany. Emerging market (EM) government bond yields exhibited mixed performance. Countries such as Hungary, Poland, South Korea, and China saw their yields rise, while Thailand, Brazil, Mexico, and notably South Africa, experienced declines, with South Africa's yields dropping by an impressive 44 bps. The U.S. dollar regained some stability and fell by a modest 0.1% versus a basket of other currencies over the month.

Within spread sectors, U.S. Investment Grade (IG) spreads tightened by 18 bps, and Euro IG spreads followed suit, tightening by 12 bps. U.S. high-yield spreads outperformed their European counterparts, with U.S. spreads tightening by 69 bps compared to 39 bps in Europe. Securitized credit and agency mortgage spreads also narrowed throughout May.

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^{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.}