This year has challenged some major assumptions for investors, the Fixed Income Leaders’ Summit, held in Washington DC, heard on 11 June.
Lori Heinel, global chief investment officer at State Street Global Advisors, said that these included: fixed income being a diversifier for the equity portfolio; Treasuries being are a risk-free asset, and the idea of ‘safe haven’ assets.
“We’ve historically seen that when you have stresses in the markets that the safe haven assets are the dollar and Treasuries, that might actually be a question in certain environments this year.
Leslie Falconio, managing director in the chief investment office and head of taxable fixed income strategy at UBS, said that while uncertainty is a big concern for investors being too focused on uncertainty, to the point that they should be staying on the sidelines in markets, or keeping their money in cash, was actually a risk in itself.
“Focusing solely on the uncertainty, really leaves a lot of opportunity on the table,” she said.
Using the full range of instruments to express investment ideas will be vital in fixed income this year, noted Heinel.
“You can get a lot more precise,” she said. “So if you have a view that maybe the five-year part of the curve is more attractive than the long end of the curve, you can actually express that. You do that using the cash markets, derivatives, but increasingly exchange traded funds as they become a trading instrument in their own right.”
Falconio observed that the lower dollar confidence was in part inspired by a convergence of global growth but also followed quantitative easing, government intervention and fiscal stimulus.
“After years of that, the dollar was just simply overvalued, regardless of policy right now,” she said. “We do believe that the dollar is looking overvalued, but we don’t think it’s lost that ‘safe haven’ status, The US overall is just too big. We don’t think it’s going to lose its base.”
Both agreed that a strong signal to follow for macro decision are the US employment numbers, as other signals prove less reliable, or consistent.
The market in 2025 would mean that they were relying on their trading desks for liquidity and market intelligence, observed Heinel.
“Being able to tap into liquidity whether that’s through trading platforms, knowing where the bodies are buried, so to speak, and having that broad network to capitalize on,” she said. “Then insight. There’s an incredible amount of intel that you get from how the trade flows are manifested. Who are the buyers are, who are the sellers are, and other dynamics that aren’t quite so obvious. The last thing is being able to operate nimbly. Some of the old trading methods may not be valuable going forward. If you’re only using the cash market, you’re going to be constrained. If you can use cash and derivatives that’s better so you’re being a bit more nimble.”
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