Fixed income investors may not be able to see them all right now, but important trends are stirring on the investment horizon. How you position your bond portfolio now will determine future results when the tide of easy monetary policy rolls out and other economic waves start to roll in.
What worked in the past isn’t likely to work in the future. What does make sense, though, is a mix of strategies designed to ensure that bonds can best do what they have always been meant to do in a portfolio, which is to:
Diversify, especially from equities.
Guard against interest rate and credit events.
Provide income.
Current market dynamics require the use of more than one strategy to achieve these goals, however. Last Friday’s strong jobs report, combined with continued steady growth in gross domestic product, offers the Federal Reserve all the ammunition it needs to start raising rates at its June meeting—which we believe it should do—meaning the need for flexibility has never been greater.
And remember, the Fed is not the only game in town. In fact, we think there are four major factors that will influence interest rates around the world: changing demographic trends, innovations in technology and energy, financial conditions as related to leverage, liquidity and cash flow, and monetary policy.
It’s our view that volatility should increase as the world moves from the pervasively synchronized easy monetary policy that we’ve seen over the past several years to the policy divergence that is showing up today. At the same time, the continued lack of fixed income supply around the world, especially in longer-maturity debt, should continue to keep yields contained.