Elaine Stokes, Fixed Income Manager, Loomis, Sayles & Company, and member of the Multisector Team, shares views on investing in a rising rate environment.
Rising Above Rates: Go-Anywhere Fixed Income Approach
How Loomis Sayles’ Multisector bond strategy finds opportunities in a rising rate landscape.
Slow hikes on the horizon
We continue to see the Fed in a position to raise short-term interest rates, probably one or two more times this year. The Fed has already hiked rates twice in 2018, and we’re up to seven times so far. The US economy is strong and as long as it stays that way, we believe the Fed will use this opportunity to gradually move rates up. We expect this slow lift in rates to continue for the next couple of years.
Rising interest rates mean higher yields and that is good for reinvestment risk.Playing defense in today’s bond market
In recent months, the Loomis Sayles’ Multisector Team has been reducing risk and building up reserves, including significantly cutting average maturity. We favor a higher level of reserves in the form of cash, short-maturity US Treasuries and investment grade corporate debt. In the current environment of elevated macro risks and increased volatility, we believe focusing on areas where the market may be mispricing risk makes sense. When the team sees significant dislocation, we will be ready to use reserve allocation in these areas.
Go-anywhere to pursue value
Having the freedom to roam across global fixed income markets, as well as make allocations to out-of-benchmark securities, can provide value and diversification, as well. For example, we can look to invest in something like a convertible bond and get some equity upside, or look over into the foreign markets to get away from traditional US interest rate risks. There are lots of different levers out there for a multisector approach to pull. At the same time, we can use our deep research capabilities to identify securities that are mispriced, and it’s those mispriced securities, that because of that research, we can take advantage of and build excess yield in the portfolios.
Such areas where Loomis’ research is finding selective opportunities today are convertible bonds in biotech and cable/satellite and high yield corporate bonds in the energy sector.
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