This year’s complex market environment lays the groundwork for actively managed strategies to potentially shine. Alex Mackey of MFS investment Management and Brett Sheely of AllianceBernstein discussed their outlooks for active bond investing this year at the Q1 2025 Fixed Income Symposium, hosted on the VettaFi platform.
Alex Mackey, CFA, co-CIO, fixed income at MFS Investment Management, kicked off the discussion with the five largest factors the firm believes will drive markets this year. These include immigration, the fiscal outlook, tariffs, regulatory policy, and energy. Mackey discussed the role that immigration plays in GDP as one example of why these factors matter so much this year.
“The idea that we are having a reversal in that vector and that immigration is going to be directionally less powerful to the upside,” is something investors should be aware of, according to Mackey. “From a labor perspective, we think that does have an impact in the near-term.”
Brett Sheely, head of ETF specialists, AllianceBernstein, further expanded on the point when talking about the role of tariffs already this year. The firm expects that for each 10% increment in tariffs, price levels will increase by 1%. “Tariffs ultimately are a tax on the end consumer, and could be inflationary in the short-term,” Sheely said.
Interest Rates and Bonds
After several consecutive interest rate cuts in 2024, investor enthusiasm and confidence in rate cuts fizzled last December. The SEC’s clearly communicated cautionary positioning, alongside potential inflationary elements, now leaves markets forecasting for two to three cuts this year. AllianceBernstein believes three rate cuts are likely, even with economic slowing.
MFS takes a much more reserved approach, with a high likelihood of one rate cut this year, and a potential for a second cut. “That’s a byproduct of the backdrop for labor — employment and wage growth seem really, really healthy,” explained Mackey. Despite healthy consumer balance sheets going into the year, the threat of higher inflation in the short-term and the trickle through effects of tariffs create a challenged backdrop.
“Something that we watch so, so carefully is labor as an input,” Mackey elaborated. “Resilience on the labor front today has been really important to being able to feel confident that the need to cut rates is materially less than it was before.”
Look to Active for Your Fixed Income Allocations
No matter what your bond outlook is, the ongoing market environment remains one that benefits active managers. Soaring yields last year on the tail-end of interest rate increases created strong opportunity for actively managed strategies in 2024. With a complex market environment this year, the ability not just to select winners but to avoid defaults within credit creates a competitive advantage for active this year as well.
“While last year was maybe not the most exciting year for bond investors, active managers fared better than most,” Sheely explained. Their ability to tune yield-curve positioning, manage risk exposures, and select exposures generated outperformance in 2024. “We think that there’s a very strong case to be made for active management within fixed income.”
When bond investing, both Mackey and Sheely underscored the importance of looking beyond the current tight credit spreads for return estimates. Instead, investors should use yield as a forward-looking indicator of potential returns. “Yield is an incredibly important predictor of what your future performance is likely to look like,” said Mackey. “That is something we may not talk enough about, and we think that it’s critically important.”
Originally published on Advisor Perspectives.
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