Investors need flexibility in bond market
The ‘safest' assets in the past may not be the safest in the future and flexibility will be needed to succeed in the bond market, according to Eaton Vance.
The global asset manager's diversified fixed income portfolio manager, Henry Peabody, said the most important evolving change for the bond market was the shift from monetary to fiscal policy as a source of growth.
"Owing to the dollar's position as reserve currency, the US has been able to consistently expand its balance sheet and lead global growth, while simultaneously lowering interest rates. This has provided bond investors with a generational tailwind of returns," he said.
"Now, the US finds itself with about $19 trillion of debt, Treasury yields that are still not far off their lows, a policy focus on growth and inflation, and a dollar that is in the upper end of its valuation range."
Peabody said this did not seem sustainable and that investors would need flexibility if they wanted fixed income as an integral part of a portfolio.
"Bonds are seen as safe, especially those backed by the US government, which prints the currency in which the debt is denominated. However, the ‘safest' assets in the past may not be the safest in the future," he said.
"Treasury yields have risen sharply as investors' position for a Trump administration. They are expecting tax cuts, infrastructure spending, less regulation and protectionist policies with the potential for erosion of purchasing power."
Peabody noted that positioning for changes would be very important for investors as was the recognition that the world was as complex and tense a place.
"The herd is often wrong — as it was when negative yielding bonds were looked at for return, while equities served as income generator," he said.
"Many domestic traditional credit sectors are at or near their historical tights in spread or lows in yield, and for this reason represent unattractive risk/reward."
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