As world recalibrates, opportunities emerge in fixed income

Duration has been in favour with fixed-income investors lately, largely on fears that U.S. growth exceptionalism could be ending, says Dustin Reid of Mackenzie Investments.

Reid said the possible end of globe-leading growth by U.S. equities has been a growing market theme, not only for the bond market but across all assets in recent months.

“The question is to what degree is that true,” he said. “As we ended Q1, we saw a pretty strong bid for duration, with the market pricing 10-year U.S. Treasuries around 4.20% or 4.25.”

As of April 14, they were trading at 4.37%

The situation calls for what he describes as a “recalibration” in all asset classes, including fixed income.

“Most small- and medium-sized firms over the last couple of months have pulled back significantly around hiring, reinvesting in businesses, [anticipating] new orders, curtailing inventory,” he said. “All those types of things that seem to suggest that we’re on the precipice of, not necessarily a recession, but a slowdown.”

U.S. growth is unlikely to sustain its current 2.5% to 3% pace, he said, adding that the most recent survey data paints a bleak picture.

“If you slow down to 0.5% or 1% growth, even though technically it may not be a recession, it will feel recession-ish,” he said. “You’ll see all the same things — higher unemployment, concerns from the consumer, less fixed-business investment, probably a slightly weaker housing market. All those sorts of things that you would expect in a real recession.”

He said the tariff confusion is only adding to market fears, largely because of the inflation component.

“The inflation component, in terms of fixed income, is obviously always very challenging. The worst enemy of nominal fixed income is inflation,” he said. “Why? Because it eats away at your returns.”

Opportunities will emerge, he suggested, in pockets of fixed income, especially for investors with a long-term view as central banks recommit themselves to fighting inflation.

I do think that we will continue to see central banks cutting rates. Maybe not in the U.S., but Canada, Europe, Australia, New Zealand, I think are likely. Some emerging markets are likely,” he said. “And so I think there are still opportunities within the fixed-income space in that two- to five-year tenure of the curve.”

Reid said investors would be wise to take a long-term view.

“A balanced approach and a balanced portfolio over a long-term horizon is clearly the way to help mitigate through these times of economic and market turbulence,” he said.

“When we see equities sell off significantly, and when we see a potentially big recalibration in how markets are going to function, that provides a really good opportunity for balanced investors or fixed-income investors.”

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This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.