Fixed Income Outlook: Beyond the Everything Bubble

 In Market and Investment Insights

In this short video, Portfolio Manager Nick Maroutsos shares why he believes risk assets should be able to perform well and interest rates will likely be range-bound in 2018. He also discusses his expectations for Jerome Powell as the new Fed Chair.

Opportunities in current environment

Currently we are in an environment where people are sort of classifying this as the everything bubble, right? You have stocks that are at all-time highs, credit spreads that are all-time tights, and global yields that are at all-time lows. But the problem is that in this current environment, you also have central banks that are looking to back stock markets. While they are looking to normalize policy and sort of withdraw some of that accommodation, ultimately they will be there to support markets, which is why we believe that we will have this global synchronized growth for 2018 and risk assets should be able to perform well. I think with respect to credit in and of itself, despite it being at all-time tights, we believe that there are very unique opportunities in parts of Asia, parts of Europe, parts of Australia and New Zealand, Canada, even within the U.S., we just need to be far more selective with those opportunities.

Rates-range bound?

Our belief is that interest rates will likely be range-bound over the course of 2018, but will have an upward trajectory. I think a lot of people are worried about rates moving higher quite aggressively, but really the world or the U.S., for that matter, can’t afford higher rates. Number one, you have the servicing of the debt, which the interest expense alone in servicing that debt at higher yields becomes an issue. But also I think there will be a natural bid toward U.S. fields in particular as they move higher, because globally other investors in countries like Japan and parts of Europe are faced with zero to negative yields. So they are sort of looking at the U.S. yields at roughly 2.5% and licking their chops saying at 2.5% relative to zero, it is a far more attractive investment than what they are getting in their home country.

Powell, more of the same?

I think with the introduction of Jerome Powell as the new Fed chair, likely to see much of the same that you saw from sort of the Yellen era. And that continuity will likely continue, however, we will say that the Fed, as well as the U.S., will likely encounter some unique challenges, be it through moving interest rates higher, normalizing policy and removing accommodation. I think that is one of the big risks that we see for 2018 is the fact that you are going to have this sort of global uncoordinated, unwind of balance sheets. The Fed has already started the process, the ECB is likely to start at least sometime mid next year. The Swiss National Bank has talked about it, the Bank of England has talked about it as well as the RIS (Riksbank) Bank. So people are looking to remove that accommodation, still keep it there over the long term, but just sort of withdraw some of that accommodation over a period of time, so that the markets become less reliant on central banks.

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Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.

Foreign securities are subject to additional risks including currency fluctuations, political and economic uncertainty, increased volatility, lower liquidity and differing financial and information reporting standards, all of which are magnified in emerging markets.