Co-Head of Global Bonds Nick Maroutsos identifies the opportunities and risks he sees for fixed income investors in 2020 as the Federal Reserve’s near-term policy path remains far from certain.

Key Takeaways

• While we expect the current trend of global easing to continue, much of the fixed income investment environment may be dictated by the Fed, which we believe hopes to delay rate cuts until a time that a slowing economy better merits them.
• With equities and corporate credits richly valued, this is not a time, in our view, to reach for yield or replace interest rate risk with credit risk; rather, bond investors should stay focused on capital preservation, income generation and reduced volatility.
• We believe some of the most attractive fixed income opportunities with regard to returns and diversification lie outside the U.S., especially when hedged back to the U.S. dollar.

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What opportunities and risks do you see for fixed income in 2020?

Nick Maroutsos: So in 2020, we see very similar opportunities that we saw in 2019. It was a function of monetary policy easing globally, so central banks easing policy throughout the year, including the U.S. So that created numerous opportunities for us in 2019 and will likely create numerous opportunities for us in 2020. We believe that the global opportunity set is immense in this space, particularly because U.S. interest rates trade higher than many other developed nations, countries like Australia, New Zealand, the UK. In the case that you are diversifying across numerous different currencies and numerous different issuers, hedging those back to U.S. dollars and picking up more yield than you would by just focusing on U.S.-related issuers.

2020 presents itself with numerous risks. You have easing monetary policy, you have trade wars, you have zero price discovery, you have central bank issuing quantitative easing, quantitative tightening, all sorts of things. But ultimately, our belief is that the Fed is going to dictate a lot for 2020. We have seen them back off their easing hand looking to maintain policy rates for the rest of 2019, but we do believe, despite what they are saying, is that they will look to reengage those cuts and look to ease policy over the course of 2020. So the real risk is whether or not that actually comes to fruition.

Given your outlook, how should investors approach fixed income in the year ahead?

Maroutsos: Ultimately, we believe that with the likelihood of increased volatility over the course of 2020 as a result of increased central bank involvement, trade wars, zero price discovery, that ultimately that is going to increase the level of volatility. But for fixed income investors, we think it is important not to lose sight of the key characteristics that fixed income provides: capital protection, income generation, low volatility. And we don’t think it is a time that people should be reaching for yield, particularly in an environment where equities are at all-time highs, bonds are at or near all-time lows, credit spreads are at all near-time lows. You shouldn’t be replacing interest rate risk with credit risk. Create a portfolio that ultimately serves as a good diversifier and can generate income.

We aren’t looking at any particular indicator for 2020. I would say it is important to listen to what the Fed says and read the tea leaves coming out of the Fed. Because ultimately they were against cutting interest rates in 2019. They wanted to keep rates on hold, but the market forced their hand and priced in cuts, and the Fed ultimately had to bless the market. The Fed is looking to push rate cuts out to further in 2020 or not at all in 2020, so they can save that ammunition for when things go sour or when we do have a downturn. So it is really a function of a balancing act between what the market is predicting and what the Fed is talking about for 2020.

Which market trends should investors
watch in the year ahead?

Explore Market GPS: Investment Outlook 2020