Post-Pandemic Inflation and Fixed Income Markets
Inflation and other market factors are discussed by a Loomis, Sayles & Company Core Plus Bond PM and Senior Macro Strategies Analyst
Persistent or Transitory Inflation
Palfrey: Clearly the Fed is hoping that many of the inflation pressures we see pushing through the economy right now are transitory. But we actually feel there are signs that these inflation pressures can persist for a longer time period. We consider this to be the single largest risk from a portfolio structure standpoint.
Burelle: As the recovery continues and we head into expansion within the credit cycle, we expect this higher inflation to be around for some time. But for the most part, we think it will be transitory. Now, the fact that this pandemic has led to an actual reopening, it means that the traditional dynamic of demand, not meeting enough supply is there. But it’s even amplified more. So we see strong demand. There is a shortage of certain goods in some cases, even skilled labor is in shortage. And we think that’s leading to high year-over-year inflation prints now. But that period will likely transition away as well.
Palfrey: We are reducing interest rate sensitivity, while still maximizing the return potential from other sectors that we feel are going to be more pro-cyclically oriented. We still find investment grade credit and areas of high yield attractive. We think that the market is now discounting a fair amount of potential damage from a Fed taper. Other sectors we like are emerging market debt and EM non-dollar.
Bank Loans vs. Fixed Rate High Yield
Palfrey: We've actually been skewing more of our incremental purchases towards bank loans. It’s a little tougher from a liquidity standpoint to add exposure there, but we do feel that risk return favors floating rate instruments and bank loans in particular, within high yield.
Corporate Credit Health
Burelle: One of our in-house frameworks is called the corporate health index or the CHIN, and it monitors a number of macroeconomic and financial market indicators to come up with this reading, which comprises the index both for present and historic. Right now, what it’s indicating is that the overall mix of financial conditions is very healthy and consequently corporate health is in good shape. So with that, the other framework we monitor on risk premiums is indicating that default rates are going to be exceptionally low. And with that, we see potential for ratings upgrades rather than downgrades. So it’s a very positive environment for credit.
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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.
Below investment grade fixed income securities may be subject to greater risks (including the risk of default) than other fixed income.
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