From Volatility to Victory: Building Resilient Fixed Income Portfolios

From Volatility to Victory: Building Resilient Fixed Income Portfolios

Excerpts from webinar discussion sharing their perspectives on managing fixed income portfolios in an era characterised by both heightened volatility and changing inflation dynamics from Chris Siniakov, managing director and portfolio manager, Franklin Templeton Fixed Income and Carol Lye, portfolio manager and senior research analyst Brandywine Global Investment Management.

Chris Siniakov, Managing Director and Portfolio Manager, Franklin Templeton Fixed Income, said: “Although the U.S. presidential election is still in its early stages, we believe that the key issue for the U.S. and the globe is the increasing focus on fiscal considerations in global financial markets. The U.S. is running a budget deficit, and this difficult and challenging environment may require continued government support. Fortunately, being a reserve currency allows the U.S. to offset higher funding costs. Nevertheless, we see opportunities for investors in shorter dated bonds vs longer-dated bonds.”

“In Australia, we are experiencing a different interest rate cycle where the Reserve Bank of Australia (RBA) has not responded to the policy tightening as expected. As a result, interest rates will likely decrease abruptly by around 100 basis points. The pacing of rate adjustments is influenced by unique economic conditions in each state. While global inflation pressures play a role, the domestic housing market’s supply-demand imbalance is a significant issue that will lead to a more cautious and gradual pace of interest rate reductions.  

“Active management is crucial in today’s complex and volatile fixed income environment. Duration can provide a hedge against market volatility, and short-dated bonds have experienced lower volatility in recent quarters. Overall, it is important for investors to navigate these dynamics in fixed income investments.”

Also read: A Rate Cut Today, But Then What?

Carol Lye, Portfolio Manager & Senior Research Analyst Brandywine Global Investment Management, said: “U.S. exceptionalism has been a major theme driving markets, but I think we are at a juncture where growth expectations in the U.S. are starting to come down, there is less fiscal spending, the labor market could be slowly softening and volatility could start increasing again.

“Although volatility in the fixed income markets will not be as high as what we experienced late last year, we think it makes a lot of sense to be more in the belly of the curve and we prefer more to be in the five-year part of the curve, which would benefit from the Fed cutting rates one or two times. 

“From a credit perspective, we are constructive on high yield, especially when it comes to generating income. Yields in the U.S. high yield market are around 9%, which is very compelling, and this is supported by strong fundamentals as defaults are still relatively low, and recovery rates in different scenarios are still looking good. 

“Additionally, we are also seeing opportunities in emerging market debt, particularly in some Latin America and central European markets.”