Fixed Income Pulse: What You Need to Know
Fixed income experts share views on yield, duration, and diversification plays in 2023, and check advisors’ sentiment from a recent survey.
- Yield is back. We haven’t seen this level of bond yields in decades. This is really important because, all things being equal, starting out with higher bond yields gives you a chance of having a positive total return.
- Long view on duration. The risks of owning duration right now have certainly changed and diminished over time as inflation peaked in 2022. If you are using fixed income to get that ballast in the portfolio, that equity risk offset, you may want to lengthen duration. While longer duration bonds tend to be more sensitive to interest rate movement, higher yields today have improved the ability for longer duration bonds to buffer against equity volatility.
- Investment grade vs. high yield. High yield tends to do well when you have an improving economy, default rates remain low, or an environment where interest rates are gradually rising because the extra spread on high yield does cushion that impact from the effect of higher rates. Investment grade corporates, on the other hand, of course, are high quality, and therefore are more defensive. They're also longer average duration, have less spread cushion. So therefore, more interest rate sensitive. So overall, IG corporates would be expected to outperform high yield in a weaker economy and in a falling interest rate environment.
- 2022 was an outlier. Bonds didn’t do their job last year. Usually, bond prices and stock prices are inversely correlated. But they both went down. However, there were unique factors that we don’t think are likely to occur going forward. Inflation ran really hot – at 9% midyear 2022. And the Fed started its most aggressive hiking cycle in history, getting the federal funds rate up to 4.375% at the end of the year. Today, bonds are in a better position to do their job.
- Debt ceiling dilemma. Our base case is a deal gets done at the last minute. One might think Treasurys would be in the eye of the storm. But barring an outright default of not paying interest, Treasurys should do well. And in the past, when we've hit those debt ceilings, Treasurys have rallied. We think that you will continue to see a flight to quality, safety, and bonds. Now you could see some disruption on the bill market in the short term. But we think that would be temporary. In addition, you have to think through how Congress will get the deal done. If that includes spending cuts, that could be another tailwind for Treasurys because that implies slower growth, slower inflation.
Natixis Investment Managers and Loomis, Sayles & Company, US Survey of Financial Professionals conducted by CoreData Research in February and March 2023. Survey included 350 respondents in the United States split equally between Independent Broker/Dealers, Wirehouse Advisors and Registered Investment Advisors (RIAs).
The data discussed represents the opinion of those surveyed, and may change based on market and other conditions. It should not be construed as investment advice.
This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions expressed are as of May 2023 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. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. 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.
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.
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.
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.
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.
Diversification does not guarantee a profit or protect against a loss.
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