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 outlook for fixed income with Katie Klingensmith, vice president, investment specialist with Brandywine Global Investment Management. We talked about inflation and interest rates, and we started by asking where she sees opportunities in fixed income in 2024.

Katie Klingensmith (KK): So if we look at fixed income for 2024, there are a lot of opportunities but they’re quite different than what we previously thought. We no longer think that the primary opportunities are going to come from the curve. We saw interest rates at the long end of the curve come down and fixed income really rally. So that was exciting. We still certainly could see some moves in that direction. But we think that the risks are much more balanced. And when we look out into 2024 in the fixed-income world, we think it’s more important to be very nimble and to appreciate that there is a tremendous amount out of heterogeneity in the opportunities and the risks in bond markets across sectors and qualities and regions. There still is a fair amount of risk in the world and we think that there’s a lot of good news priced in. We definitely think there are opportunities in global credit and U.S. credit, even though spreads are pretty narrow. We also think there are quite a few opportunities globally, both in some developed-market economies, as well as certain areas of emerging markets. And we’ve also found some exciting opportunities with varying amounts of risk and a lot of liquidity and a very clear macro story from our perspective, in the structured side of fixed-income investing in U.S. housing.

How rate cuts could play out

KK: The Fed certainly got us all excited at the end of last year around a pivot, indicating that they likely had reached the highest policy rate and would be looking to ease monetary conditions. I think since then, we have received a series of different data points suggesting that perhaps that pivot was a little too enthusiastic. Regardless, we really think that inflation is coming down, and we do feel that the Fed will be able to cut interest rates throughout this year. But the Fed may keep rates a little higher for longer if the U.S. economy is still looking reasonably robust and inflation numbers aren’t entirely satisfactory. That’s tricky, in terms of how it plays out in fixed-income markets. Clearly if we have rates higher for longer, we can enjoy — and I’ll tell you that we are enjoying — those really attractive coupons without taking on a lot of duration.

Preparing portfolios for steepening curves.

KK: From our perspective the steepening is going to happen more in the near end of the curve. So while we talked about how the Fed may take a little longer in cutting rates, we do expect that the Fed will be cutting rates, and with that the curve will flatten. And we accept that the longer end of the curve may actually be a bit more aligned to long-term growth and inflation, and maybe around the 3.5%. So, it will take quite a bit of Fed cutting to actually have a regular yield curve again. But in that process, we want to be very aware of what’s going on in the data, and where the opportunities are. We think that there are currently still really interesting income opportunities without a lot of duration in the portfolio. So we look to have exposure to different credit sectors, segments, and we look to have global exposure in different markets, and be very nimble, and think across those different curves, but again without taking on a lot of duration, given that anticipated shift in the curve. And we still are comfortable with having some additional exposure to the longer part of the curve, because we still think that there’s some economic uncertainty, and that we want to have that safer duration, probably have at least some of it in a portfolio.

And finally what’s the bottom line for fixed-income investors in 2024?

KK: Fixed-income investing is exciting in 2024. But we also need to keep in mind that there’s a lot of good news priced in. So there are income opportunities. They exist in many different geographies and sectors. We want to be looking very carefully at the specifics of those opportunities and risks, but it’s a time to be nimble, mindful of shifts in the economic outlook. And that requires a lot of selection and a lot of anticipation and reaction to information. Right now is an environment where having investment strategies that are really mindful of all of those different opportunities is more important.

Well, those are today’s Soundbites, brought you by Investment Executive and powered by Canada Life. Our thanks again to Katie Klingensmith 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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Funds:
Canada Life Global Multi-Sector Bond Fund – mutual fund
Global Multi-Sector Bond - segregated fund
Fonds:
Obligations mondiales multisectorielles - fonds distinct
Fonds d’obligations mondiales multisectorielles Canada Vie - fonds commun de placement