The Late Cycle

This video concludes our series on bond investing late in the cycle. For more on this topic, read our fixed-income outlook for 2020.

Eric Winograd: What markets do you think are most vulnerable at this stage? Where do you think that we see signs of markets that may have gotten a little bit further ahead of other markets?

Scott DiMaggio: When we still look, we’re still talking somewhere in the area of 10 trillion dollars’ worth of debt that has negative interest rates. To us, that doesn’t make any fundamental nor economic sense. And if we were to see a correction in rates markets, those negative yielding places are probably the ones that are the most at risk.

However, I do think it brings us to: What do we recommend to investors? And we talk a lot about this at our strategy meetings. And in our impromptu desk conversations.

And this notion of a barbell, this notion that if in fixed income, you can balance that risk, balance that risk between what are the credit and growth opportunities out there. So, things that pay you in yield, whether that be high yield, whether that be securitized assets, emerging markets, but also to balance that with the uncorrelated, less correlated part of the market, like duration.

So again, while duration we don’t think is screamingly attractive, it still provides that good diversification. It still gives you that anchor to windward when equity markets correct, or [when] there is a spike in volatility.

So, we still think that this balance between this growth and credit assets and duration and being able to blend those really is a good solution in this environment where people still need yield, that search for income continues. But, however, that risk and that balance we think is still critical for portfolios.

EW: The idea of balance is really important, because when we look at 2020, by definition, we don’t know what the unexpected events will be over the course of this year.

If you think back [to] a year ago, right now the Fed had only recently acknowledged that they wouldn’t be raising rates any further. The Fed came into 2019 intending to raise rates, and the market had confidence in that path. They ended up cutting rates three times.

So, things can change. And having balance in a portfolio protects you against those changes.