Chart: Three paths to find opportunity in fixed income

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After a challenging start to the year, investors look to position their fixed-income portfolios based on interest rates and the economy.

  • We think future Fed rate hikes are currently well reflected in Treasury yields. The Fed’s policies will be effective in curtailing inflation but could slow growth.
  • Inflation and growth expectations for the economy will most likely continue to shift. It’s important for fixed-income investors to remain flexible and calibrate exposures to interest rates and credit risk in their portfolios.

 

Three paths to find opportunity in fixed income: Choose the scenario you find most likely

I think the Fed will have to play “catch up” and raise rates faster

Reduce interest rate risk (i.e.,
duration) as much as possible

Bonds with lower duration,

including:


■   Floating rate
■   Ultra-short 
■   Short-term municipal 

 

I think the Fed

will get it “just right”

Overweight credit risk versus interest rate risk

Credit-centric asset classes, including:

■   Corporate bonds
■   Flexible multisector
■   Non-Agency MBS/ABS
■   High-yield municipals

I think the Fed will hike the economy into recession

Look for protection from credit-related volatility

High-quality, duration-centric strategies, including:

■   Core
■   Core plus/Intermediate bonds
■   Intermediate/Long munis

 

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