Volatility in fixed income markets has created a challenging environment for investors. A more agile approach to asset allocation could help them take advantage of compelling opportunities in fixed income.
Ongoing uncertainty around inflation and monetary policy, both in the US and around the world, has complicated the outlook for fixed income investors. The Federal Reserve’s rate increase in September – its first in more than three years – is expected by many to herald a further period of monetary tightening, and US Treasury yields rose sharply in the weeks that followed. This in turn has had a negative impact on the outlook for US growth and risk markets.
At the same time, the rapidly increasing levels of debt issuance related to AI, and hyperscalers in particular, has created a ’crowding out’ effect which has driven US Treasuries higher and negatively impacted fixed income credit markets leading to increased caution and concern among investors and regulators.
Traditional fixed income investing can limit opportunities and force investors into a narrow range of instruments, sectors, and interest rate exposure due to constraints tied to linked sectors and benchmarks.
Multi-sector bond strategies operate across the credit spectrum, and can typically invest in areas ranging from high yield and emerging markets to investment grade credit, US Treasuries and even foreign-exchange instruments. Managers of multi-sector bond strategies are able to aggressively and actively move in and out of sectors in response not just to changes in market and macroeconomic conditions, but also to their own data analysis and forecasts. Multi-Sector bond strategies also have the potential to adjust interest rate exposure to protect and enhance returns.
This approach can be useful in a variety of environments, but especially during turbulent and volatile periods such as these. The potential value of an approach to fixed income investing that is not confined to a specific sector makes sense to us. Multi-sector bond strategies are predicated on the idea that, within fixed income – and, indeed, practically every type of financial asset – no specific sector is capable of outperforming over long periods of time.
In the current fixed income market environment, yields are high relative to recent history, and this is largely a reflection of the recent spike in rates as well as a range of risks facing investors right now. This has created a strong opportunity set for investors in fixed income.
The opportunity in duration
The opportunity in duration
Interest rates are elevated all around the world, due in large part to recent rises in geopolitical and political risk – from tariffs and conflict in the Middle East to higher levels of government spending and deteriorating fiscal positions in several major economies, and also, in particular, elevated inflation coupled with ongoing economic growth. While some of these factors are more deep-seated, structural challenges, it is possible that the factors which have driven recent increases in energy prices and, as a consequence, inflation will reverse over the course of 2027.
Looking at the yield curve as a whole, we feel that the best opportunities may be found at the longer end, which has come under a disproportionate amount of pressure due to the market’s fears around inflation. Indeed, our view is that rising prices have had a significantly more material impact on 10- and 30-year Treasuries than the recent Fed action; Fed rate hikes have a greater influence on the shorter end of the curve. The possibility of a lasting peace settlement in Iran – and potentially also in Ukraine – would in our view lead to a decline in inflationary pressures.
The opportunity in credit
The opportunity in credit
The expansion of capital expenditure linked to artificial intelligence (AI) over the past few years is showing little sign of slowing down. Reuters reported in July that Goldman Sachs expects AI hyperscaler issuance to reach USD 400 billion in 2027, and this is an area where we are seeing very attractive spreads – in particular in the tier below the likes of the Mag 7. There has started to be an element of pushback towards names that perhaps do not have quite such strong balance sheets, and yields are up as a result.
These two examples of potential opportunities – and the myriad factors that influence them – highlight the challenges and uncertainty facing fixed-income investors at present. Arguably, this situation simply represents a ‘new normal’ that emerged as a result of the inflation spike of 2022 and the rapid monetary tightening that followed it.
We continue to keep believe a core position in asset-backed securities (‘ABS’) makes sense, as it often presents attractive relative value vs. industrial corporates, and the sector increases the overall credit quality and diversification to our strategies.
In conditions like these, we believe the ability to actively make fixed-income allocations across a wide range of sectors and instruments without constraints can be particularly valuable. In light of this, we think the time is right for investors to consider the potential benefits of a multi-sector bond approach.
Code: M-007656
