Looking at the current fixed income environment, nominal interest rates remain low, and credit valuations are elevated, but a positive economic outlook supports credit sectors. In the T. Rowe Price article, “Fixed Income: What To Do Now,” by Terry Davis, Portfolio Construction Specialist, a deep dive is taken assessing the current state of the market, as well as how to position a portfolio to compensate for what’s ahead properly.
During a 40-year bull market for bonds, yields on 10-year U.S. Treasures fell from 15.84% in 1981 to 0.51% in 2020. By the end of March 2021, they’ve rebounded and reached 1.74%. Total returns within fixed income were in negative territory during this down period, including long-term government debt, intermediate-term core, and core-plus.
As noted in the article, “A recent paper ‘Leveraging a Diversity of Perspectives on Rising Rates,’ Head of Investments and Group Chief Investment Officer Rob Sharps highlights the diverse views of our firm’s investment professionals on the direction of interest rates and resulting investment implications. Sharps believes that diversity of thought benefits our investors.”
The figure below further details how current conditions weigh on traditional fixed income ballast sectors.
Configuring Portfolio Positions
Fixed-income allocations are a good area to keep track of for financial professionals attempting to provide relative stability, particularly in a volatile market. As reflected in the figure below, in a low-interest rate environment, moves made in the intermediate-term and short-term areas have increased portfolio duration.
Sources: T. Rowe Price Client Investment Platform (CIP) database and Morningstar Direct.
Based on allocations to underlying funds for Moderate Risk models. Duration calculated as of each year’s end.
Solutions For Portfolio Constructions
With the changes going on in the market, repositioning fixed income portfolios is a good move. T. Rowe Price can help with this thanks to their integrated suite of Portfolio Construction Solutions, which provides access to the company’s multi-asset expertise and global investment resources.
For more news, information, and strategy, visit the Active ETF Channel.