- Fixed Income Portfolio Manager
Skip to main content
- Funds
- Insights
- Capabilities
- About Us
- My Account
United States, Institutional
Changechevron_rightThe views expressed are those of the author at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.
Investors hoping to see markets in 2024 shrug off the volatility and uncertainty that defined 2023 have been left disappointed. Disruption and change continue to challenge investment decisions amid ongoing geopolitical fragmentation, relentless swings in markets, and increasing divergence in monetary policy, economies, and supply chains. However, we see clear opportunities supporting investing in fixed income. And credit appears to offer a nuanced component to navigate today’s macro landscape.
A key difference from last year is that investors know they cannot sit on the sidelines for much longer now that interest rates appear to have peaked. Inflation is likely to remain high, due to both supply and demand factors, and the US Federal Reserve (Fed) might cut rates by less than markets expect.
Yet company revenues and levels of leverage could mean that default rates peak lower than expected, which is typically associated with a tightening in credit spreads, which would spell good news for corporate bond returns. As a result, investors may want to consider moving incrementally into longer-maturity fixed income sooner rather than later to lock in attractive yields now, before the Fed begins cutting rates and markets price that in.
The fixed income team puts a lot of effort into trying to understand how the Fed’s reaction function might evolve. Through experience, we have found that it is more important to invest based on the economic reality that the Fed faces, rather than focusing solely on what it’s trying to communicate and the subsequent market reaction. For example, over the past few months, our skepticism that the Fed would engage in aggressive rate cuts led us to hold more cash than we would on average, meaning less duration.
On balance, we expect longer-term rates to be a bit more stable than short-term rates. As a result, although last year saw investors look to stay in cash and time the markets, changes in rates are unlikely to be the biggest driver of returns this year. We are more focused on relative-value credit decisions, forecasting credit returns in excess of whatever rates do.
With starting yield levels offering a much more appealing cushion for fixed income portfolios than they did a few years ago, credit is performing better now than many people expected. Coupled with dispersion across markets, this backdrop translates into pockets of value in specific sectors for investors — including bank loans, emerging markets (EM) corporate debt, select European high-yield names, financials, structured finance and certain African credits.
We believe that the bond market's reaction to eventual rate cuts will depend on why the Fed is cutting. If the Fed cuts rates because growth has weakened more than expected, investors will likely want to buy high-quality long bonds. On the flipside, if the Fed cuts because inflation has fallen but growth remains relatively strong, we will see a soft landing and investors will likely opt for riskier bonds such as low-quality, including EM, debt.
As investors seek value in today's investment landscape, we think that a top-down, credit barbell strategy can lead to a more optimal risk/reward portfolio. More specifically, a common school of thought among investors is to buy investment-grade (IG) credit to reduce risk and buy high yield to add it. Instead, when IG is expensive (as it seems to be today), a better strategy to reduce risk might be to balance high-yield exposure with high-quality securities like Treasuries and asset-backed securities.
With this in mind, an often undervalued and underappreciated part of the market is the EM corporate sector. The current risks of tight policy are more relevant to the US than EMs, which look better value amid inflation being under control. In particular, many EM corporates derive their revenues from developed markets, so can be more stable than their underlying countries, and investors are still receiving an attractive risk premium, especially in some BB and B names.
Ultimately, we think the new market environment calls for a more nuanced and active approach to credit in order to find the most promising opportunities. When looking for those opportunities across different sectors of the global fixed income universe, we consider various factors. How much active credit risk should we take? Which sectors should we use to take our desired amount of credit risk? And are we getting suitably compensated? Incorporating deep research and taking an active approach is, in our view, the most effective way for investors to take advantage of today’s more volatile market environment.
Expert
Time for bond investors to take the wheel?
Continue readingAre bond investors ready for a US industrial revolution?
Continue readingSecuritized credit: Normalizing, decelerating, or falling off a cliff?
Continue readingMultiple authors
Rate relief: Fed cuts half point, but says “economy is strong”
Continue readingDiving into the new world of credit
Continue readingCLO equity insights: Private credit
Continue readingPrivate placements: A primer for corporate DB plans preparing to derisk
Continue readingURL References
Related Insights
Stay up to date with the latest market insights and our point of view.
You've been subscribed
Thank you for subscribing. You can manage your subscription using the links provided in any of our subscription emails.
Time for bond investors to take the wheel?
Volatility makes bond investing less straightforward, but it can also create opportunities, provided investors are in a position to "take the wheel" in order to capitalise on them.
Are bond investors ready for a US industrial revolution?
Portfolio Manager Connor Fitzgerald discusses why bond investors should ready themselves for a potential US industrial revolution and shares his perspective on how to reposition portfolios for such a scenario.
Securitized credit: Normalizing, decelerating, or falling off a cliff?
Our experts offer their views on the current conditions and outlook for the securitized credit market.
Multiple authors
Rate relief: Fed cuts half point, but says “economy is strong”
Our expert explains the Fed's bold rate cut and some key takeaways for investors.
Diving into the new world of credit
Now that spreads have tightened, some investors think it's too late to invest in credit. But this assumption could be standing in the way of earning an attractive income.
CLO equity insights: Private credit
Explore how the convergence of public and private markets is impacting CLO equity, including the unexpected benefit it has driven in recent years.
Private placements: A primer for corporate DB plans preparing to derisk
With many corporate DB plans exploring derisking opportunities, Portfolio Manager Elisabeth Perenick and Multi-Asset Strategist Amy Trainor discuss the potential role that private investment-grade credit, or private placements, could play and consider common questions about liquidity and allocation sizing.
Insurance Quick Takes: US life insurers’ utilization of private placements
In our latest Insurance Quick Takes video, Tim Antonelli discusses research on US life insurers’ use of private placement investments, and shares observations for insurers globally.
Still waiting…Fed wants more data before cutting policy rates
Our expert dives into Fed policy following the July FMOC meeting.
Office to multifamily conversions: Implications for CMBS investors
Our experts explore the emerging trend in some US cities of converting office space into multi-family units and its implications for bond investors.
Multiple authors
Chart in Focus: Four key areas of opportunities in bonds amid Fed uncertainty
We discuss four key areas of opportunities in fixed income amid Fed uncertainty in the second half of the year.
URL References
Related Insights
© Copyright 2024 Wellington Management Company LLP. All rights reserved. WELLINGTON MANAGEMENT ® is a registered service mark of Wellington Group Holdings LLP. For institutional or professional investors only.