Welcome to Soundbites, weekly insights on market trends and investment strategies, brought to you by Investment Executive and powered by Canada Life. For today’s Soundbites, we’re taking a look at bond performance as we round the halfway mark of 2023 with Katie Klingensmith, senior vice president, investment specialist with Brandywine Global Investment Management. We talked about trends and themes she’s watching, and where she sees opportunities and risks. And we started by asking about her current view of the global bond market.

Katie Klingensmith (KK): The global bond market has been a complicated place to be for the last couple of years. Interestingly, 2022, as we all know, was a terrible year for bond investors. It was just really painful to have bonds experience such a sharp drop in price, given the upturn in rates. But that has made for a much more exciting and diverse environment in which to be in the bond market. We overall think that 2023 will continue to be a place where there are many different pockets of opportunities. And really, overall, given the macro backdrop, we’re bullish on bonds in general.

Trends and themes she’s watching

KK: So many different things happening in the world are affecting fixed-income markets. I mean certainly, for one, inflation. That’s the number one. But there are so many other themes that we’re watching closely. A second big theme is slowing economies globally, trying to understand where we are in that economic cycle. It’s not our view that we’ll get a sharp downturn but that’s a possibility. To name some other themes, we’re always focused on geopolitics, and are reminded that there is a war that’s very close to some of the biggest economies in the world. So, there’s a lot to think about as fixed-income investors right now.

Finding the best bond returns

KK: There really are a lot of opportunities in fixed income right now. We find opportunities in a lot of places. We like having duration. We do think that 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. The sovereign safer bonds like U.S. treasuries — but not only U.S. treasuries — can make a lot of sense in this environment. And, additionally, it gives some safety, a ballast, to a portfolio if some of the downside risks that we’re all mindful of do materialize. We have found a number of opportunities in emerging markets, especially local emerging markets. We have some favourite regions and countries. So, we’re looking globally and thinking about currency exposure as part of that package. And, in addition, we certainly have been positive on credit. We tend to like the space between investment grade and high yield. So higher-quality high yield, and some investment-grade issuers. We do think that coupons are paying pretty nicely, and that that will allow us to stay invested and be compensated for being invested, even if there’s a fair amount of volatility.

Regions she likes

KK: We find opportunities in both developed and emerging markets. In developed markets, we do like some long-dated treasury exposure, especially in Europe, and France, the U.K., Germany. It’s a pretty different situation in Japan. While we like the currency and we do think that the Japanese economy is growing and that slowly the Bank of Japan is moving away from their need to control the yield curve totally, we could see rates move the other direction. So, we would be cautious on directly investing in Japanese bonds. Emerging markets, it’s an interesting time because we don’t see a homogeneous picture across the different regions. We don’t see the same opportunities in Asia that we see right now in Latin America. In Latin America, and to some extent in Central and Eastern Europe, we saw a set of countries who really implemented very aggressive monetary tightening, way back in 2021 and early 2022. And now, with inflation falling globally and in those countries, we’re actually entering into positive rates for a lot of those different countries.

And finally, what financial advisors and wealth managers should keep in mind.

KK: What we would advise at this point is to be very data dependent, just like the central banks, nobody will know what comes next. To be aware that there’s still the real potential for downside. So, to 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 to be very active, very choosy, among the many opportunities that exist in the bond world right now. The opportunities exist in all the sectors, in all the 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. So, it’s an exciting time, and an important time to be very tactical around building that fixed-income portfolio.

Well, those are today’s Soundbites, brought you by Investment Executive and powered by Canada Life. Our thanks again to Katie Klingensmith of Brandywine Global Investment Management. Visit us at investmentexecutive.com, where you can sign up for our a.m. newsletter and never miss another Soundbite. Thanks for listening.


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