Bond Are Back……Now What?
Risk Is Everywhere……It’s How You Define It.
Opportunities and risk exist in the fixed-income space as questions remain about whether or not the Fed will continue to tighten. With the long end of the curve starting to look appealing, the short-end yield remains attractive. Investors need to unpack how they are approaching the fixed-income space.
Things that The Gardner Group are reviewing on the fixed-income side of the portfolios include:
- A review of current and possible Fed policy around tightening.
- An exploration of the emerging threats to the dollar as the world’s reserve currency and what that means for non-US bonds.
- An overview of the possible strategic options in the fixed-income space. Government, to corporate to high yield.
- Clients’ overall risk tolerance and need for current cash flow.
If anything, 2022 reminded us that there is risk everywhere. Bonds have historically been perceived as “safe” investments. A massive spike in interest rates last year threw that concept out as bonds posted some of their worst performance in history.
However, The Gardner Group still believes the rest of 2023 will present us with some excellent long-term investment opportunities. Although the world remains tricky, we believe the possibility the U.S. economy may avoid a recession this year, or that the recession is mild, and stocks do not drop as sharply as some expect.
A lot still depends on the Fed and how much further they tighten (raise rates). If the Fed pauses their hiking campaign sooner than later, equities may positively respond (at least over the short-term), as lower interest rates imply higher P/E multiples. But there are numerous other key variables for the economy and financial markets that are beyond the Fed’s or any policymaker’s control. The recession may be pushed out to 2024 but we doubt it’s been rescinded.
As we approach the year’s halfway mark, patient investors have been rewarded significantly. That does not mean we should make a knee-jerk reaction and change our risk tolerance to capture more return. Just like we should not have changed it at the lows of 2022 either.