Fixed income outlook: Navigating the post-election landscape

The fixed income landscape has changed in the wake of the US presidential election. In this podcast, Kevin McCullough and Mark Cintolo delve into the implications of these changes and offer insights on how to navigate the evolving market.

Key takeaways:

• With cash returns declining, investors may want to reevaluate their approach to lock in higher returns over multiple years
• The Bloomberg US Aggregate Bond Index (the Agg) has become increasingly concentrated in US Treasuries, exposing investors to drawdowns from more concentrated bets
• The election outcome has led to a repricing of the growth backdrop, impacting duration-sensitive strategies

Over the past few years, an overly simplistic approach to fixed income allocations may have been adequate. Holding cash or cashlike securities might have been a safe bet in a rising interest rate environment.

As the fixed income outlook has changed with cash returns now declining, investors may want to reevaluate their approach to lock in higher returns over multiple years. This could be especially crucial for those with a time horizon greater than a year or two. Investors may want to consider numerous factors, including investment risk, limiting concentration risk, and diversifying across multiple macroeconomic paths.

Concentration risk beyond the Agg

There are potential risks associated with relying solely on the Agg as a fixed income benchmark. The Agg has become increasingly concentrated in US Treasuries, exposing investors to drawdowns from more concentrated bets. The Agg is only half the overall US fixed income universe, so investors may be missing out on diversifying exposures from other fixed income segments. To mitigate this risk, a more diversified fixed income sleeve that includes broader securitized categories, high yield bank loans, and collateralized loan obligations, may provide more opportunities to maximize risk-adjusted returns.

Navigating multiple macroeconomic paths

The US presidential election outcome has led to a repricing of the growth backdrop, impacting duration-sensitive strategies. The market has elevated the range of expected yields, making it potentially a good idea for investors to adopt a flexible approach to account for different interest rate and spread scenarios. Most fixed income asset classes have a combination of either duration or rate exposure, or a credit or spread exposure. Rates are driven by inflation and growth expectations, while spreads are primarily dominated by those growth expectations.

A core satellite approach may help achieve better risk-adjusted returns. This strategy involves a mix of core plus and lower duration, more flexible satellites to target outperformance in different scenarios. By diversifying across the yield curve and leveraging active management, investors may potentially enhance their portfolios' performance and mitigate risks.