Why Go Low Looking For Fixed Income Opportunities
Much has been said about the challenges facing fixed income climate advisers and investors this year, but overall disaster is averted and parts of the bond market are proving surprisingly resilient.
Still, investors are likely to be concerned about the effects of inflation, however transient, on bonds and whether or not the Federal Reserve will proceed with an interest rate hike sooner than expected. Only time will tell what the results of these scenarios will be, but an ounce of prevention is often better than a cure.
One way to prepare for the worst is to shorten the term while looking for credit opportunities to cushion the yields on still anemic government and municipal bonds.
“Low-duration assets are one way to protect against capital losses in a rising rate environment because they benefit more quickly,” said Mark Hackett, Nationwide’s chief investment officer, research, in a recent memo. . “This group has been sidelined by many investors due to the low level of absolute returns and the strong relative returns of longer-lived assets.”
With still low 10-year Treasury yields and declining default risk, corporate bonds could be a prime destination for investors looking to exploit credit opportunities while bolstering their income. The arguments in favor of this asset class are reinforced by the improvement of the economy and the need to increase income in an inflationary environment.
“In the meantime, exposure to credit-sensitive assets could ease the low-yield environment, as improving economy, accelerating earnings and rising commodity costs act as a tailwind,” Hackett added.
One thing is clear: Advisors and investors should not get into predicting when the Federal Reserve will increase borrowing costs.
“Since the financial crisis, the consensus of economists has been high in their estimate of the 10-year return 10 times out of 11, the last two years being among the worst. The bias is almost exclusively upward, assuming a reversion to the mean, ”adds Hackett.
Of course, rates have tended to fall over this period and are now at historic lows. Investors would do well to focus on things they can control, including credit and duration risk, and leave the guesswork to other market participants.
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