After a torrid first quarter for fixed income, we ask whether it is possible to build an all-weather fixed income portfolio. Jordan Sriharan, multi-asset fund manager at Canada Life Asset Management, said understanding the divergent drivers of European, British and US yield curves is critical.
‘There are nuances between different monetary policy cycles, and there’s a slight divergence,’ he said. ‘More importantly, there are also small nuances within the inflation outlooks for those different economies.’
Quilter Cheviot’s head of fixed income research, Richard Carter, noted that there had not been many hiding places in the asset class this year. The fund selector said he was still backing investment grade corporate debt, as well as shorter-dated credit that had ‘held up reasonably well’.
The duration risk conundrum
Fund managers noted that rate risk, particularly at longer maturities, was much more dangerous than solvency, however. Ben Seager-Scott, head of multi-asset funds at Tilney Smith & Williamson, said: ‘In credit, I’d still keep duration relatively short - in the three- to five-year range.
‘In gilts I’m still favouring below benchmark - so around the five-year mark. But there are interesting opportunities starting to present themselves towards the seven- to 10-year mark.’
Carter added that he was underweight duration, but added that fear of Fed errors may have caused markets to overshoot: ‘I’m relaxed about duration when you’ve got Treasury yields in the US at 3%, and gilts at 2%. A lot is priced in already, in terms of the Federal Reserve’s rate hikes. I’m not sure being massively short duration is the easy trade that it was before.’
Yield curve inversion concerns
In the video above we explore concerns over a key recession indicator - the inversion of the US Treasury yield curve. Last month the two- and 10-year Treasury yields inverted for the first time since 2019, as 2024 yields climbed above 2032 maturities in a possible recession warning.
Seager-Scott said: ‘A lot of people have been focusing on the two/10s, which has been a traditional measure of a warning sign. But yield curve inversion is often a better signal when you don’t have extraordinary monetary policy, which is deliberately designed to alter the yield curve.’