Fixed Income Outlook - a video with Portfolio Manager Liane Rosenberg
Q: How have you been structuring the fixed income portfolios with the anticipation of future rate increases?
A: Our fixed income has had a relatively low risk profile as can be measured by their lower duration relative to the index. We’ve had this shorter duration posture on for some time in anticipation of a gradually rising rate environment. We do expect at least two rate hikes this year, but are not yet convinced that the economy will support the four that the Fed has spoken about. We’ve shifted some of our curved positioning in anticipation of a gradual rise in short term rates that would likely lead to curve-flattening. We believe that inflation will remain well-contained due to low energy prices and low wage growth. For the time being, we are really not likely to see a rise in back-end rates. Credit-wise, we had more of a risk-off posture this past year, due to weak global growth and a likely spread-widening across the credit spectrum. With rates rising, we would tend to look very opportunistically to add some risk, probably increasing our current overweights in corporate and securitized bonds, and pulling back in Treasuries, as they don’t tend to perform as well as spread product when rates are rising.
Q: What is the impact of the high yield fallout to the broader corporate market?
A: This past year was a tough one for the high yield market, as it was significantly impacted by the drop in energy prices. Many of the worst performers in high yield were from this sector, as well as from metals and mining companies. And the weaknesses in these sectors were big factors in spreads ballooning from about 500 bps over Treasuries to about 700 bps over Treasuries by year end. This weakness in high yield spilled over into the investment grade corporate bond market and for many of the same reasons. There was a large sub-sector of energy companies that were investment grade rated–many rated BBB–and this group faced the same downward price pressure on oil prices as their high yield counterparts. Many investment grade credits in both the energy and metals and mining sectors took on high yield trading characteristics.
Q: What macro factors do you find most insightful in your fixed income analysis?
A: The consumer is critical as the consumer still represents roughly 70% of GDP. Starting with employment data, we are obviously looking at job creation, the unemployment rate and the labor-force participation rate– or the number of people who are either employed or actively looking for work. We are also looking to get a sense of how optimistic the consumer is feeling–it’s not just having a job, but also what is the outlook for increased compensation? Are wages rising? Do consumers feel more confident in spending? CPI is also a key indicator: We need to know what consumers are facing in terms of prices and the trends in these prices. Other indicators related to the consumer include retail sales, the trends in retail sales, as well as consumer confidence. Additionally, Fed action globally is key to our markets. Easing by several central banks will tend to put downward pressure on our rates. Buyers flock to the U.S. when other key treasury markets like Japan and most of Europe are now. And of course, we are always monitoring the strength of the dollar, oil prices and technical market factors like new bond issuance and supply and demand pressures.