A brief summary of the five reasons fixed income is back on the agenda from George Bory, chief investment strategist for Fixed Income at Allspring Global Investments.
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René Picazo: I’m René Picazo, head of the Wealth Client Group at Allspring Global Investments, and you’re listening to On the Trading Desk®. I recently spoke with George Bory, chief investment strategist with the firm, and we discussed the five reasons fixed income is back on the agenda. You can listen to the entire accompanying podcast on this channel, but here’s a summary of George’s five reasons for fixed income from our conversation together.
George Bory: Just to be super crystal clear, what are we doing in our portfolios? Well, number one, we’re pretty neutral duration. The reality is yields have moved up. We were short at the beginning of the year. We closed that short during the middle of the year. We’re neutral now, but we’re getting really close to what we’d call the value zone. 3.5% to 4% on 10-year yields, to us, does start to look relatively attractive. So, the bias is to extend duration. We haven’t really pulled the trigger yet, but we still like flatter yield curves. The Fed (Federal Reserve) is in full tightening mode. Yields are going to continue to invert and monetizing flatter yield curves now make a lot of sense. Number two, I can’t stress this enough, but as a bond investor, you want to lock in positive real yields. We’re able to do that today. You weren’t able to do that 12 months ago, but you can do it today in a whole host of different parts of the market. We strongly recommend investors try to do that. Third, you want to be cautious with your credit, but we’re not going to give up on the credit trade. Right now, what we would call credit convexity, that’s the ability to capture current yields but also benefit from bonds that tend to trade at a very low dollar price. The combination of those two factors means I get income, but I also get capital appreciation as we move through time. Credit convexity should be beneficial to any bond investor. We like to capitalize that and we’re working it into portfolios. Fourth, securitized bonds. The way we think about securitized bonds is that we’re looking for stable cash flows in an unstable world. We like the dynamics that we see in the asset-backed market and, to a certain extent, in the mortgage-backed market as well. These are two parts to the market that can be a nice buffer, if you will, to the cyclicality that you’re seeing in the more traditional parts of the market. And then lastly, munis. Munis tend to outperform taxable debt in a rising rate environment and should provide some cyclical diversification. So hopefully that five-pronged strategy, if you will, it presents a road map to how to navigate the market as we go into the end of the year. It provides a certain degree of diversification, but it’s really set up to maximize yield and income. 80% of a fixed income portfolio’s returns comes from the compounding of the income you receive from coupons. We want to maximize that. We’re limiting some of the duration, but duration’s starting to look attractive. We’ll inch in as yields go up, but for now, we want to maximize as much of that income as possible.
René: Thanks to George for all the wonderful insights. Please listen to our full conversation of the five reasons fixed income is back on the agenda by subscribing to the On the Trading Desk® podcast on Apple Podcasts, Spotify, Google Podcasts, or wherever you get your podcasts. Until next time, I’m René Picazo, and thanks for listening.
Disclosure: Diversification does not ensure or guarantee better performance and cannot eliminate the risk of investment losses.
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