Displaying items by tag: macro

The federal reserve is holding steady with interest rates, at least at the current time, but other central banks around the globe are cutting and other hiking, creating opportunities in fixed income. While this is certainly adding a level of depth to portfolio management that hasn’t been present often in the last decade, high yields indicate great returns in fixed income.

According to Goldman Sachs investors should consider upping their exposure to high quality fixed income, emphasizing active management due to unpredictable US monetary policy. Despite expectations of rate cuts, recent inflation data suggests a "higher for longer" environment, meaning higher rates may persist. 

As a result, US equities may still be attractive, but some investors are shifting towards fixed income to capitalize on strong yields, particularly in high-quality investment-grade bonds and structured products.

Finsum: Active investors continue to have an edge with disparate monetary policy actions around the globe. 

According to panelists at the SALT conference, private credit will continue to experience strong growth over the next few years. Additionally, they believe that reports of banks stepping in to more aggressively compete with private credit lenders are overblown. Instead, there’s more likely to be partnerships between private credit investors and banks in terms of originating deals and arranging terms.

Michael Arougheti, the co-founder and CEO of Ares Management, sees private credit compounding at an annual rate of 15% for the next decade. He sees growth driven by cyclical and secular factors such as companies staying private for longer, the current high-rate environment, and many ‘good’ borrowers with weak balance sheets. Another factor is the billions being raised for private credit funds across Wall Street. 

Panelists also agreed that there are many selective opportunities in fixed income and credit at the moment. And more opportunities should emerge over the next year, especially with rates staying higher for longer. Arougheti believes that there will be more opportunities created by the lack of liquidity. This underscores another difference between the current environment and past cycles for distressed debt - weakness is not sector-specific, rather, it’s more rate-induced. 

Finsum: At the SALT conference, panelists agreed that despite headlines, private credit markets will see strong growth over the next few years. They also see more attractive opportunities emerging given high rates and limited liquidity. 

In the past few years, the bond market has experienced increased turbulence as the U.S. Federal Reserve embarked on an unprecedented tightening cycle, successfully driving down inflation from 9.1% in June 2022 to 3.4% by the close of 2023. Despite the Fed's efforts to maintain stability since July 2023, fixed-income markets remain volatile, particularly in the 10-year U.S. Treasury yield. Throughout 2023, bond yields underwent significant fluctuations, reflecting market instability despite ending the year close to where it began.

Looking forward, uncertainties persist regarding economic growth and interest-rate policies, emphasizing the need for active management within fixed income. Prioritizing high-quality investments remains crucial amid mixed economic indicators and narrowing high-yield spreads, suggesting a prudent approach to portfolio diversification. 

Furthermore, strategies involving duration positioning and sector rotation offer opportunities for active managers to capitalize on shifting market dynamics, highlighting the importance of adaptability and responsiveness in navigating bond markets.

Finsum: Fund managers can lean into historical analysis and precedent in volatility and factor selection could lead to more robust returns for active management.

Earlier this year, PIMCO cited expectations that the Fed would start a series of rate cuts as one of its reasons to be bullish on fixed income. The asset manager is revising this view given the lack of progress on inflation and now sees rate cuts being delayed until the end of the year or even into 2025.

Following the latest FOMC meeting, PIMCO sees the Fed pursuing a policy similar to the 1990s, when the Fed held rates and allowed inflation to trend lower over time. Fed officials seem wary of the downside risks of further tightening and are willing to concede higher inflation in the near term. 

Despite a recent uptick in inflation, the Fed seems content to hold rates at steady levels. During his press conference, Chair Powell remarked that monetary policy was restrictive and that rates could be lowered if the labor market weakened. He added that a rate hike was ‘very unlikely’ and that the inflation in resurgence could be temporary due to seasonality and noise. 

While fixed income rallied following the FOMC meeting, PIMCO expects FOMC members to raise their inflation forecasts from 2.6% to 3% for core PCE at the upcoming meeting. The firm also sees an increased risk of no rate cuts this year if inflation data comes in closer to 3% than 2%.

Finsum: Following the latest FOMC meeting and hot inflation data, PIMCO is lowering the odds of a Fed rate cut in 2024. 

State Street is bullish on fixed income. It believes that institutions should take advantage of attractive yields and that macro conditions are improving, albeit in an uneven fashion. Investors can achieve their diversification, return, and income goals without compromising on credit quality.

Many pensions have been able to close or shrink their funding gaps due to higher yields from Treasuries and investment-grade corporate debt. At current valuations, bonds are able to more effectively function as a hedge against weaker economic growth and serve as an effective hedge against equities. 

State Street sees the economy in a sideways period for rates and inflation. Therefore, it recommends that investors get long duration and see a more favorable environment eventually emerging for borrowers. It forecasts that inflation and Fed rates will end the year lower, providing a tailwind for fixed income.

In terms of active vs. passive strategies for fixed income, State Street takes a nuanced approach. It believes that in certain sectors, capable active managers have proven to add value. But this alpha has been shown to erode over time.

State Street has built a systematic approach towards fixed income which uses a rules-based approach. It weighs factors like value, sentiment, and momentum. It sees considerable benefits to increased electronic trading for fixed income, which has resulted in more data and liquidity. 

Finsum: State Street is bullish on fixed income due to attractive yields and an improving macro environment. In terms of active vs. passive fixed income, it takes a nuanced view.