Fixed Income Outlook Second Quarter 2016

Global Fixed Income

Treasuries: While we continue to evaluate the durability of the U.S. business cycle, recent data suggests that the fourth quarter was a temporary soft patch for the U.S. economy. Importantly, job growth remains robust with an average payroll gain of 252,000 over the past five months. As such, we anticipate a couple of rate increases during the year; the Federal Open Market Committee moved closer to this viewpoint in March as the median number of expected rate hikes in 2016 declined to two. Overall, we believe U.S. rates will be range-bound. On one hand, dialogue about the potential to overshoot the 2% inflation target could push rates higher. However, U.S. dollar strength is setting a speed limit on interest rates, due to the stress it puts on China and emerging markets more broadly.

Developed Market Non-U.S. Debt: Negative interest rate policies in Europe and Japan continue to have massive implications for global sovereign debt. Due to interest rate differentials and wide-ranging policy stances, we anticipate divergent trends across developed market non-U.S. debt. Additionally, the increasingly volatile currency dynamics we’ve witnessed in recent months will likely continue to have an impact going forward.

Global Purchasing Manager Indices Imply a Soft Patch

Source: Bloomberg. Data as of February 29, 2016.

High Yield Fixed Income

We continue to hold a slightly above normal return outlook over the next 12 months for high yield fixed income, and see opportunity in the category given elevated yields and potential for spread tightening. While the environment may remain volatile in the near term, we believe that the direction of pricing appears favorable and that high yield fundamentals, including relatively benign default rates and a likely continuation of the credit cycle, remain intact.

Emerging Markets Debt

EMD fundamentals generally remain under pressure due to slow growth, exposure to the commodity downturn in many cases, and uncertainty about China’s financial and structural reform efforts. We believe weak domestic demand is likely to keep a lid on emerging markets growth over the next 12 months. Lower commodity prices hurt producer economies and the strong service-sector orientation of the recovery in developed markets is impairing the growth pass-through to emerging markets. Despite these near-term risks, a recent widening in yields could allow for relatively attractive returns on a 12-month horizon for both hard and local currency bonds. We currently prefer sovereign bonds to corporate bonds due to more favorable valuations while corporates suffer from weak growth and low commodity prices, combined with constraints on access to funding. We continue to see value in local bonds but our appetite is restrained by continued pressures on EM currencies.

About the Asset Allocation Committee

Neuberger Berman’s Asset Allocation Committee meets every quarter to poll its members on their outlook for the next 12 months on each of the asset classes noted. The panel covers the gamut of investments and markets, bringing together diverse industry knowledge, with an average of 24 years of experience.

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The views expressed herein are generally those of Neuberger Berman’s Asset Allocation Committee which comprises professionals across multiple disciplines, including equity and fixed income strategists and portfolio managers. The Asset Allocation Committee reviews and sets long-term asset allocation models, establishes preferred near-term tactical asset class allocations and, upon request, reviews asset allocations for large diversified mandates and makes client-specific asset allocation recommendations. The views and recommendations of the Asset Allocation Committee may not reflect the views of the firm as a whole and Neuberger Berman advisors and portfolio managers may recommend or take contrary positions to the views and recommendation of the Asset Allocation Committee. The Asset Allocation Committee views do not constitute a prediction or projection of future events or future market behavior. This material may include estimates, outlooks, projections and other “forward-looking statements.” Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed.

A bond’s value may fluctuate based on interest rates, market conditions, credit quality and other factors. You may have a gain or a loss if you sell your bonds prior to maturity. Of course, bonds are subject to the credit risk of the issuer. If sold prior to maturity, municipal securities are subject to gain/losses based on the level of interest rates, market conditions and the credit quality of the issuer. Income may be subject to the alternative minimum tax (AMT) and/or state and local taxes, based on the investor’s state of residence. High-yield bonds, also known as “junk bonds,” are considered speculative and carry a greater risk of default than investment-grade bonds. Their market value tends to be more volatile than investment-grade bonds and may fluctuate based on interest rates, market conditions, credit quality, political events, currency devaluation and other factors. High Yield Bonds are not suitable for all investors and the risks of these bonds should be weighed against the potential rewards. Neither Neuberger Berman nor its employees provide tax or legal advice. You should contact a tax advisor regarding the suitability of tax-exempt investments in your portfolio. Government Bonds and Treasury Bills are backed by the full faith and credit of the United States Government as to the timely payment of principal and interest. Investing in the stocks of even the largest companies involves all the risks of stock market investing, including the risk that they may lose value due to overall market or economic conditions. Small- and mid-capitalization stocks are more vulnerable to financial risks and other risks than stocks of larger companies. They also trade less frequently and in lower volume than larger company stocks, so their market prices tend to be more volatile. Investing in foreign securities involves greater risks than investing in securities of U.S. issuers, including currency fluctuations, interest rates, potential political instability, restrictions on foreign investors, less regulation and less market liquidity. The sale or purchase of commodities is usually carried out through futures contracts or options on futures, which involve significant risks, such as volatility in price, high leverage and illiquidity.

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