What Fixed Income Managers Are Thinking Now

The past year has provided no shortage of major changes in the market for fixed income managers to assess. As one example, a year ago many expected multiple rate hikes by the Federal Reserve. Now, almost all forecast additional rate cuts before the end of the year.

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To better understand the current market climate, we conduct regular conversations with managers. Here is a summary of their views on a variety of key issues:

BUSINESS CONDITIONS: Overall corporate fundamentals are still fairly stable year-over-year, with most managers expecting neither improving nor deteriorating conditions. However, we have seen an uptick in managers that expect conditions to deteriorate.

CORPORATE BONDS: The investment grade and high yield sectors are generally seen as stable from a fundamental and technical perspective. That said, some managers have upgraded quality/shifted to a more defensive posture with respect to corporate exposure. Thus far this year, investment grade corporates have continued to find strong bids despite worries about BBB-rated issues, which first surfaced late last year. Thanks to this year’s rally in interest rates, IG corporates outpaced their below-IG brethren by more than 360 basis points to return 13.6% as of 8/16/19 (IG corporates typically have a longer duration). Adjusted for duration, high yield outperformed, adding 458 bps of excess return while IG added 330 bps.

INTEREST RATES: Views on interest rates have changed markedly. Last year, most market participants projected two rate hikes and they were correct; the Federal Open Market Committee implemented two quarter-point hikes in the second half of 2018.

Now most managers that we communicate with are calling for two cuts in 2019, with some calling for 1-2 and some for 2-3. (Our interactions with managers largely predate the July 31 FOMC meeting and Chairman Jerome Powell’s press conference, so it’ll be interesting to see if Powell is able to deliver only one hike over the next three meetings scheduled for this year.)

MACRO: Biggest concerns continue to be:

  1. trade tensions/trade war
  2. monetary policy/flat yield curve
  3. political uncertainties affecting global growth

And yes, negative-yielding global debt that is approaching $15 trillion also raises concern for many market participants.