Fixed Income Symposium Highlighted Opportunities in New Rate Regime

The session titled “Outlook on Interest Rates: How to Position Fixed Income Portfolios” featured Vanguard’s Bryan Quigley and PIMCO’s David Braun, both portfolio managers at their respective firms. They tackled the question of what a fixed-income portfolio should look like after the first interest rate cut in years. Any future rate cuts in 2024 would be “data dependent,” with the uncertainty around the election among the factors adding to market volatility, they acknowledged.

“We think as long as the U.S. and the Fed are able to avoid outright recession, corporate bonds should be able to continue to perform,” said Quigley, noting that fundamentals looked strong.

“Moving Out of Cash and into Bonds” brought together Northern Trust Asset Management’s Head of Fixed Income Client Portfolio Management, Ronit Walny, and Natixis Investment Managers Co-Portfolio Manager, Brian Kennedy. They discussed moving away from cashlike positions, with the Fed in a rate-cutting regime and inflation remaining sticky.

“I do think on a secular basis, we’re looking at a more challenging inflation environment than what we’ve dealt with over the past 20 years,” said Kennedy.

“If you were used to a zero to two percent inflation world in the past, you’re probably looking at something closer to two to three, three-and-a-half percent going forward,” he added.

Later, during the session titled “Multi-Sector Bond Investing: Where Do the Rewards Outweigh the Risks?” Brian Ellis, CFA, managing director at Morgan Stanley Investment Management, and Paul Norris, vice president and senior portfolio manager at American Century Investments, talked about where they are finding opportunity in the fixed income sector.

“We’re trying to focus on what do we realize, in terms of upside, if that solid landing does play out. I think what we conclude is that it’s really not an environment where we should expect broad spreads tightening across many sectors. You really should be emphasizing more carry and more income to portfolios,” said Ellis.

“As we enter through the election, and then outside the other side of the election, it’s going to be bumpy,” noted Norris.

“We think agency mortgages are a really great defensive instrument that will outperform during these bumpy periods,” he added.

In “Make Room for CLOs,” William Sokol, VanEck director of product management, offered his insights on collateralized loan obligations (CLOs) and discussed how they could be a good antidote to volatility in fixed income markets.

“Rates are higher than they were at the beginning of the year," noted Sokol. “I actually think that’s taken a lot of investors by surprise,” he added.

“Now maybe that makes rates more attractive for sure. But we think volatility is really going to be a factor going forward, certainly for the next few weeks. I mean, we have an election coming up and we actually see a strong case for continued high and maybe even higher long-term yields, so we think it makes sense to be cautious right now,” he continued.

In the session “Should You Have Dedicated Corporate Bond Exposure?” Jay Small, a portfolio manager at Fidelity Investments, and Craig Altholz, a client portfolio manager at Invesco, addressed the opportunities and risks in the corporate bond space.

“As equities increase, if you’re in a balanced portfolio, say your typical 60/40 type portfolio, if that 60% moves higher than 60%, you have to sell those equities to then buy more bonds. So that’s been a tailwind as well [for corporate bonds],” Small said.

“What we’re trying to do is be top quartile consistently in up markets by hitting singles and doubles…Then kind of tread water, be towards the median, in down markets, which is about 10% of the time,” Altholz pointed out.

“If you can do that consistently, then over time what you’ll have is a strategy that is top quartile to top decile on both total return and risk-adjusted return,” he added.

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