September Fixed Income Outlook in 5 Charts | ETF Trends

By Sage Advisory

1. The New York Fed has placed a roughly 40% probability that there will be a recession in the next 12 months, a trend that has been steadily increasing.

NY Fed Recission Odds

2. Higher economic risk and lower rate expectations has been positive for high-quality core fixed income, but it is not a good combination for lower-quality spread sectors. Valuations in high yield and other riskier spread sectors are at historically tight levels, offering little cushion in a spread-widening scenario.

High Yield Spreads

3. Correlations to equites among higher-risk fixed income are also at historically high levels, suggesting a greater vulnerability to any risk-off environment.

High Yield Correlation

4. Core fixed income still offers investor diversification benefits vs. equities with negative correlations to equity returns. Using 4Q18 as a recent example – investors reaching for yield too aggressively will be hurt in an equity drawdown scenario.

Index Sector

5. An outlook that includes Fed rate cuts and higher economic risk suggests higher allocations to fixed income. Core fixed income looks the most attractive when weighing risk-adjusted returns with diversification benefits.

Weiging Diversification and Risk Adjusted Returns

*Source on all charts is Bloomberg.

To view our September Equity Outlook in 5 Charts, click here.

This article was written by the team at Sage Advisory, a participant in the ETF Strategist Channel.

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