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

Peter Palfrey, VP, Portfolio Manager, Relative Return, and Craig Burelle, VP, Senior Macro Strategies Analyst, at Loomis, Sayles & Company share their insight on navigating fixed income markets in a post-pandemic world. Below are highlights from their conversation.

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.

Portfolio Positioning
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.
This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions expressed are as of June 2021 and may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted, and actual results may vary.

All investing involves risk, including the risk of loss. Investment risk exists with equity, fixed income, and alternative investments. There is no assurance that any investment will meet its performance objectives or that losses will be avoided. Past performance is no guarantee of future results.

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.

Credit risk is the risk that the issuer of a fixed income security may fail to make timely payments of interest or principal or to otherwise honor its obligations.

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.

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.

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