"It's an Attractive Time for Fixed Income": Strategist

As the yield curve dis-inverts and major central banks begin to ease or cut rates, investors are presented with an attractive landscape for fixed income investments. According to Jonathan Finkler, head of fixed-income services at Bartlett Wealth Management, "It's an attractive time for fixed income" as the changing economic landscape offers opportunities for investors to review and position their holdings optimally.



The recent dis-inversion of the yield curve, coupled with the Federal Open Market Committee's (FOMC) decision to cut interest rates, signals a shift in monetary policy and a potential rate-cutting cycle. This environment is supportive of fixed income assets, particularly those with longer durations, as falling yields make these assets more attractive.

Robert Scrudato, director of options and income research at Global X ETFs, is cautiously optimistic about the potential tailwinds for fixed income investments from a rate-cutting cycle. He argues that a long-winded rate-cutting cycle could prove supportive to bond portfolios from a value perspective, particularly with duration exposures out toward the longer end of the curve.



However, investors should be mindful of the potential for aggressive rate cutting to promote a resurgence of inflation. As such, it is crucial to consider sector-specific opportunities and focus on generating consistent income through a well-diversified, income-focused portfolio.

In light of the current market conditions, investors are advised to review their fixed-income holdings and consider the following sectors:

1. Securitized sectors (outside of agency mortgage-backed securities (MBS)): U.S. securitized credit has been trading cheap relative to corporates for some time, offering compelling opportunities for attractive risk-adjusted returns. In the first half of 2024, securitized credit spreads broadly tightened, resulting in outperformance. Specifically, collateralized loan obligations (CLOs), commercial mortgage-backed securities (CMBS), and asset-backed securities (ABS) were notable securitized subsectors to register positive returns.
2. Dollar-denominated emerging markets (EM) debt: EM debt has been trading cheap relative to corporate credit, while many developing economies are ahead of the Federal Reserve (Fed) and other developed-world central banks in their rate-easing cycles. Countries with improving fundamentals and ratings potential, as well as countries in the sub-investment grade portion of the EM index, have been standout performers.
3. High yield and bank loans: Despite high-yield credit spreads trading near their historical tight levels and investor concerns around bank loan default rates, the high-yield and bank-loan sectors have outperformed. Robust incoming economic data and earnings, coupled with strong corporate fundamentals and favorable demand-supply dynamics, have supported returns in these sectors.

In conclusion, the strategist's assessment of the current economic landscape influences their investment strategy by encouraging investors to review their fixed-income holdings, adjust their duration exposure, consider sector-specific opportunities, and focus on generating consistent income through a well-diversified, income-focused portfolio. As the yield curve dis-inverts and central banks ease or cut rates, investors are presented with an attractive landscape for fixed income investments, particularly those with longer durations and exposure to specific sectors.