Transcript: Fed pivot should create multiple tailwinds for fixed income
Siena Sheldon says investors that are still underweight fixed income should consider increasing their allocation
- Featuring: Siena Sheldon
- September 10, 2024 September 10, 2024
- 13:01
iStockphoto/gorodenkoff
Siena Sheldon
Welcome to Soundbites, weekly insights on market trends and investment strategies, brought to you by Investment Executive and powered by Canada Life. For today’s Soundbites, we’re talking about the Fed’s next move with Siena Sheldon, vice president, client portfolio manager with Brandywine Global Investment Management. We talked about U.S. growth forecasts, and we started by asking what to expect when the Fed meets Sept. 17th.
Siena Sheldon (SS): With the latest inflation print as well as the jobs figure, we believe this really supports a high likelihood that the Fed will need to cut in September. Really, the longer the Fed waits here, could mean that they are risking a hard landing or recession. Therefore, we’re expecting a 25- to 50-basis-point cut at their next meeting. And likely you’ll see additional rate cuts in sequence if inflation continues to ease. Right now, the market is pricing in around six to eight rate cuts over the next 12 months or so, and we would probably agree with that, as long as inflation continues to decline. Now, although we are expecting some sort of growth slowdown in the U.S., it should be noted, our base case is not a recession at this point, but the Fed has a tough balancing act with a dual mandate of full employment and bringing inflation down, and they will certainly need to start cutting here to ensure they keep that full employment promise.
What the market is pricing in
SS: The recent moves in both bond and equity markets have been substantial, and certainly in the bond market that rate cut is already being priced in, with some market pricing in not only that September rate cut, but around six to eight rate cuts in the next 12 months. Ten-year yields have come down significantly in the last month, and, in fact, we’re back at December 2023 lows in yields. In equities, you’ve certainly seen some increased volatility, but we would expect this to calm down in the next several months, as long as the Fed is able to cut and avoid any recession scenario.
Fixed-income strategies
SS: We have been positioned for falling rates this year with U.S. Treasury duration exposure going into this bond rally that we have had over the last couple of months. Given that the Fed is at the peak of their rate-hiking cycle, we knew that looking from history, that having some U.S. Treasury duration exposure on at this point in the cycle presented a good total return opportunity. So, we have definitely benefited from that. We have balanced this with some shorter-duration, higher-quality, high yield in our multi sector strategies. In U.S. high yield, specifically, you have great starting prices in the 90s. And at the same time, even on the front end of the curve, you’re getting a really great starting yield. Now, we are being conscious that spreads are tight, but absent of any real recession, any spread widening is largely cushioned by that great starting yield.
Sector impacts
SS: We like energy, basic materials names within U.S. higher-quality, high-yield corporate credit names. These guys have not waited to refinance. They’ve already done so. They’ve also had really good pricing power throughout this cycle and will continue to have pricing power. Really, the focus should be on businesses that offer attractive yield, price and spread valuations considering their underlying fundamentals. So, for example, companies with higher interest coverage, lower leverage ratios and not necessarily going too far down in quality at this point in this cycle.
U.S. growth forecasts.
SS: Our growth outlook in the U.S. is one of cautious optimism. We do see some sort of growth slowdown in the U.S., but at the same time, we do believe they will avoid any recession scenario, should they cut rates in a relatively timely way.
And finally, what’s the biggest takeaway for financial advisors?
SS: We do believe that any investors that are still underweight fixed income should reconsider increasing their allocation at this point. There are multiple bond-positive tailwinds in the fixed income market right now, including that, one, inflation continues to decline; two, a Fed pivot is imminent and with that you get a great investing environment for bonds; and, three, you have great starting yields and coupon in multiple parts of the fixed-income market right now. Really you want a portfolio that can take advantage of the multiple bond-positive tailwinds. But at the same time, you want a manager that is doing the bottom-up work, so choosing credits with good fundamentals and avoiding any defaults and not going too far down in quality.
Well, those are today’s Soundbites, brought to you by Investment Executive and powered by Canada Life. Our thanks again to Siena Sheldon of Brandywine Global Investment Management. Visit us at investmentexecutive.com, where you can sign up for our a.m. newsletter and never miss another Soundbite. Thanks for listening.
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