Mid-year blackboard

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Even if the first half of 2023 hasn’t been stellar for bonds, steady returns and growing pockets of opportunity suggest the full year will be a reasonably good one for bond investors, says Katie Klingensmith, senior vice-president, investment specialist with Brandywine Global Investment Management.

“We would still say that this is a year for being a bond investor,” she said.

Speaking on the Soundbites podcast this week, Klingensmith said opportunities exist in all sectors and regions.

“That’s of course always the case, but there’s more diversity right now. There’s less correlation across all of those different sectors,” she said. “So, it’s an exciting time and an important time to be very tactical around building that fixed-income portfolio.”

She advises wealth managers and financial advisors to remain vigilant in assessing opportunities.

“Be very data dependent, just like the central banks,” she said. “Nobody will know what comes next. Be aware that there’s still the real potential for downside. Be looking for portfolios that have some diversification or offer some sort of ballast, not just to fixed income but to a broad set of risk assets. And then be very active, very choosy, among the many opportunities that exist in the bond world right now.”

She said the potential for volatility should not preclude exposure to corporate credit and emerging market sovereign bonds. “The yield compensates. So, while we could see more spread volatility, we’re actually getting paid at this point in the cycle for holding onto those higher-coupon, potentially slightly lower-quality bonds.”

Klingensmith acknowledged the global bond market has been “a complicated place” for the last couple of years.

“2022, as we all know, was a terrible year for bond investors,” she said. “It was just really painful to have bonds experience such a sharp drop in price, given the upturn in rates.”

But she and her colleagues remain “bullish” on bonds in general.

“Given the turmoil that’s in the global economy and all of the changes that have happened to fixed-income markets, it’s a time to focus on specifics, to not just generically be buying the curve,” she said.

Inflation remains the biggest theme she’s monitoring, but she’s also watching global economic performance.

“It’s not our view that we’ll get a sharp downturn but certainly that’s a possibility,” she said. “And a slowing U.S. and global economy seems likely to us.”

In addition, there are a host of geopolitical considerations, including the war in Ukraine.

“So there’s a lot to think about as fixed-income investors right now,” she said. “We like having duration. We do think inflation will fall and that, ultimately, in the next six to 12 months, we’ll have interest rates fall. So that means holding onto long bonds.”

Klingensmith suggested safe sovereign bonds like developed-market treasuries can make a lot of sense in the current environment.

“They offer some safety, some ballast, to a portfolio if some of the downside risks that we’re all mindful of do materialize.”

Even emerging market sovereign bonds hold promise, especially in markets like Colombia, Peru, Mexico and Brazil.

“There may be some volatility in spreads but it’s still appropriate to have some exposure to spreads,” she said. “And so long as there’s not a dramatic hard landing, there are opportunities in growth areas like emerging markets.”


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

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