The Federal Reserve has indicated on several occasions that they will keep interest rates high for a longer period of time, which has disappointed some investors. The Fed’s policies mixed with myriad economic headwinds have together opened up new opportunities for investors, including shifting investments into fixed income.Thank you for reading this post, don't forget to subscribe!
John McClain, Brandywine Global Portfolio Manager, joins Yahoo Finance to discuss his thoughts on the Fed’s policies, where its true intentions lie, and how investors should prepare for these new opportunities.
On the current economic environment McClain says, “This is a generational opportunity for investors to move capital from equities to fixed income. The relative attractiveness of fixed income compared to equity markets is the strongest it has been in more than 20 years.” “We believe that areas of the market that are relatively short-term are particularly interesting at the moment, so we highlight high yield at 9.5% yield, which is a Goldilocks opportunity for investors with low default rates. Creates lower dollar-denominated bonds, and higher yields.”
For more expert insights and the latest market action, click here to watch this full episode of Yahoo Finance Live.
– People are looking at their retirement, they’re looking at their 401(k) and the Fed doesn’t care about your 401(k) right now. However, at what point does that narrative change?
John McClane: Okay J. Powell Scrooge McDuck, okay. Like, yeah, he definitely doesn’t care about the stock market or his 401(k). And I think it’s a misnomer that a lot of people thought that the Fed stepped in on March 20 because the stock market was falling. That’s why he didn’t come.
He came to restore order in fixed income markets, especially treasuries. You basically couldn’t trade Treasuries for a certain amount of time during the depth of COVID, and that’s what the Fed cares about. It is an organized financial market. They don’t care about the stock market. And in fact, we would be a long way from the Fed’s position at this point.
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– And of course, I have to ask you about the action that we’re seeing with bond yields and the impact that duality is having on stocks. What are your predictions about where it goes from here? I mean, we’re obviously going to be in this holding pattern of higher interest rates for longer periods of time for the foreseeable future.
John McClane: Yes, we said so. And this is–look, this is a generational opportunity for the investor to shift capital from equity to fixed income. The relative attractiveness of fixed income compared to equity markets is as strong as it has been in more than 20 years. We believe that areas of the market that are relatively short-term are particularly interesting at the moment. So we highlight the high yield at 9.5% yield which is creating a Goldilocks opportunity for low default rates, low dollar value bonds and high yield investors.
The longer part of the treasury curve is particularly challenging at this point. We’re taking a closer look here to see where the 10 years end up. And if we close above 5% at a time, I think that could potentially cause a real blow to back-end yields. We can see a huge jump in the yield here.
And you have to note the ineptitude of Washington DC at this point. You have politicians like this – it takes three weeks and 4 speakers to elect a new president. So, you know, I think we have to wait and see fiscal discipline from DC because if we don’t have fiscal discipline, you could see a material increase in back end interest rates.
– And certainly, I mean, when you now have a new president who is a Trump supporter and it’s going to be a tough sell to try and get some kind of way to avoid a government shutdown here. When you combine it with what we’ve seen as you mentioned there with the inverted yield curve, when you combine it with the potential recession, what are your recession projections? How deep do you think it’s going to go and what could potentially change that narrative?
John McClain: Look, we’re in the early stages of a recession in 2023. And I think as we mentioned briefly, the financial engineering and creativity of the CFO has really lengthened this cycle. And I don’t think we’re going to see a recession here in the next 12 months. So I think it’s constantly being pushed out.
But as far as we see bond yields going, you know, again, the back end of the curve is relatively unclear, but the front end of the curve is reasonably if not particularly attractive.