💡(14 Investment Insights) Fixed Income Update
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🎯 (14 Investment Insights) Fixed Income Update 👇
1. “Fixed income has returned as an effective diversifier, justifying an increasing allocation in a balanced portfolio and extending duration beyond cash.”
INTEREST RATES MUST FALL SOON
2. “This sanguine state of affairs cannot continue indefinitely. New borrowers and those needing to roll over existing debt will face the harsh reality of higher interest rates.”
3. “In that sense, hopes for “soft landings” for the economy and corporate profits require that interest rates come down, preferably sooner rather than later.”
WHAT DOES IT MEAN THAT INFLATION IS FALLING?
4. “The good news is that most measures of inflation - goods prices, shelter costs and wages - have peaked and have been declining.”
5. “Falling inflation means that central banks will not likely need to engage in additional aggressive interest rate hikes.”
6. “But if higher interest expense and recession are to be avoided, falling interest rates must soon follow welcome declines in inflation.”
7. “Otherwise, an eventual increase in interest expense will eat into both consumer spending and corporate profits, potentially putting the expansion at risk to a corrosive increase in debt servicing.”
INVESTMENT OPPORTUNITIES
8. “The highest-quality areas of the credit market have become more attractive. Bond yields are now comparable to the S&P 500 earnings yield for the first time in at least 20 years.”
GENERALLY HIGH-QUALITY, SHORT DURATION
9. “When broadly looking at higher-quality credit, the default risk premiums are sufficiently attractive to compensate investors, even with some probable slowing of economic activity.”
10. “Accordingly, within credit markets, we broadly prefer higher quality, shorter-duration holdings and see opportunities in mortgage-backed securities.”
11. “The case for higher-quality, long-duration bonds has improved as a likely peak in interest rates arrives sooner rather than later.”
12. “A decline in rates could provide more capital appreciation to the more interest-rate sensitive longer duration bonds.”
HIGH QUALITY HIGH YIELD
13. “High-yield bonds with stronger ratings profiles due to better fundamentals look to be a potential total return opportunity.”
“High-yield debt has a shorter duration profile than other parts of the fixed income market, while at the same time providing equity-like total return potential.”
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Disclosure
This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. This material has been prepared for informational purposes only. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.