Yield Opportunities Now in Fixed Income Markets
Higher yields are creating attractive opportunities in fixed income, says Co-Head of Loomis Sayles Full Discretion Team.
Yield advantage: You have to go back before the Global Financial Crisis (2008) to see the kind of yields that we are seeing today in the fixed income markets. The starting yield is a very important characteristic for any fixed income portfolio – and it’s a very good estimate of your forward potential returns.
Areas of opportunity: When I look at the yield in the US Treasury market, with the Federal Reserve nearly done with its interest rate hiking cycle, and inflation peaking and rolling over, that’s a good setup to move out the curve. So we are extending our duration and bringing portfolios closer to some of the traditional benchmarks.
Late cycle ideas: From a top-down perspective, mainly in North American markets, we actually see very good fundamentals. Even given the prospects of a mild downturn, you’re getting a nice premium to invest in areas like BBB, BB, investment grade corporate, and high yield corporates, as well as in the securitized space. So we have some access there. And then we’re seeing some opportunities opening up outside of the United States and tilting potentially into the emerging market space.
Recession watch: We all know that the economic data has been weakening. The question is how much will the economy be slowing down. To be realistic, we should expect a mild downturn. What does that mean? It could mean a period of below trend growth at best, or even a modest level of recession.
China and inflation: China is coming out of its zero-Covid policy, and we’re paying close attention to that. We think it is likely to be inflationary in some areas and disinflationary in others. On the inflationary front, we’re keeping a close eye on energy and commodities. As they rev up, we’re going to start to see more demand for those resources where there’s already some tightness. In the trade area, it could lead to some disinflation.
Fixed income securities may carry one or more of the following risks: credit, interest rate (as interest rates rise bond prices usually fall), inflation and liquidity.
Foreign and emerging market securities may be subject to greater political, economic, environmental, credit, currency and information risks. Foreign securities may be subject to higher volatility than US securities, due to varying degrees of regulation and limited liquidity. These risks are magnified in emerging markets.
High yield bond spread, also known as a credit spread, is the difference in the yield on high yield bonds and a benchmark bond measure, such as investment grade or Treasury bonds. High yield bonds offer higher yields due to default risk.
Liquidity refers to the ease with which an asset, or security, can be converted into ready cash without affecting its market price.
Interest rate risk is a major risk to all bondholders. As rates rise, existing bonds that offer a lower rate of return decline in value because newly issued bonds that pay higher rates are more attractive to investors.
Duration risk measures a bond's price sensitivity to interest rate changes. Bond funds and individual bonds with a longer duration (a measure of the expected life of a security) tend to be more sensitive to changes in interest rates, usually making them more volatile than securities with shorter durations.
Alpha is a measure of the difference between a portfolio's actual returns and its expected performance, given its level of systematic market risk. A positive alpha indicates outperformance and negative alpha indicates underperformance relative to the portfolio's level of systematic risk.
This material is provided for informational purposes only and should not be construed as investment advice. The analysis and opinion expressed represent the subjective views of Matt Eagan as of February 17, 2023 and may change based on market and other conditions.
There can be no assurance that developments will transpire as forecasted. Actual results may vary.
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