What excites you the most looking ahead as a fixed income investor?
Probably the most exciting opportunity set I've seen in 35 years of being a fixed income investor. In fact, we're calling it the golden age of fixed income, because across virtually every asset class that exists today, you get this combination of incredibly attractive all-in yields, but very low implied volatility. And when you put that together, you can create an incredible sharp ratio portfolio that's high quality and diversified.
How has the role of active fixed income changed in an investor’s portfolio in the current market regime?
We are in a different regime than anything that existed prior to the pandemic. It's a different macro regime as well as a different investment regime. So from a macro perspective, we have much faster nominal growth today. And it's driven by a handful of what we would call durable influences that don't appear to be interest rate sensitive. At the same time, you've got higher inflation decently above the Fed's target, driven by sticky core services inflation that also don't appear to be interest rate sensitive.
And that has four, really demonstrable impacts in markets today. One, is nominal rates are higher than we are accustomed to all across the curve. Two, yield curves are flatter. Three, there's more volatility in these risk free rate markets. And four, there's a lot more dispersion. But again all of these things are opportunities. So the way we're tackling these is from a duration perspective.
We have extended duration to the front to the belly of the curve while avoiding those longer tenors. There's not enough term premium out the curve. And then in terms of asset allocation we are focused on corporate credit, securitized assets, taking advantage of yields that are higher than they've been really quite frankly, in a generation.
What do clients need to be aware of when thinking about fixed income in their portfolio?
The traditional use cases for fixed income are still applicable today. That being income, capital preservation, and equity diversification. Though, the regime is different, all of those use cases still very much are pertinent for fixed income investors. As far as the income piece goes, today, yields are so much higher than they've been at any time over the last couple of decades.
You can build a portfolio today in a diversified way across corporate credit, across securitized assets, and increasingly taking advantage of bespoke opportunities in the private credit markets. As it pertains to capital preservation. When you think about those, all in yields, and you think about the degree to which there is a cushion that we call carry break even.
And so in this more volatile environment, when you get these short term interest rate shocks that do create short term negative price return because your carry is so powerful. As it pertains to equity diversification. You think about the degree to which those attractive all-in yields today are comprised of the risk free rate.
In the event of some adverse shock. There are hundreds of basis points for those expressions to rally in ways that would offset widening credit spreads, and that could help offset the kind of negative price action you would almost definitely have in that adverse shock scenario in your equity portfolio.
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