Outlook For 2019
When asked about the outlook for fixed income in 2019, Michael Arone, chief investment strategist at State Street Global Advisors, was circumspect.
“The Fed is likely on hold, but interest rates could be a lot more variable than we think,” he offered. He advised investors to stay defensive, while avoiding taking equity-like risk in their fixed income portfolios.
“Stay on the short end; don’t take on too much interest rate risk; and don’t take on too much credit risk in 2019,” Arone added.
Goldman’s Singer agreed on the attractiveness of short-term rates. “Cash is king,” he said. “In today’s environment, you’re getting somewhere between 2.25% and 2.75% on cash.” Therefore, “optimizing your cash is key.”
Still, he advised that owning “some level of duration and high-quality duration makes sense within a portfolio in 2019.” Singer believes credit could perform quite well this year, but investors should be mindful we’re late in the cycle.
“Have strategies and filters that could weed out underperforming issuers,” he suggested.
Meanwhile, Columbia Threadneedle’s Tannuzzo says the most important thing investors can do in 2019 is stay diversified. Cash may be attractive right now, “but If you look historically, when the yield curve is flat, the best forward returns come from long-term bonds,” he noted.
Additionally, investors should “diversify into credit sectors and global sectors,” Tannuzzo said.
The Case For High Yield
First Trust’s Housey had a somewhat more aggressive outlook for 2019 than the rest of the panel.
“The 2019 playbook is really similar to 2016. The Fed is on pause; they’re not done,” he explained. “Risk sentiment is going to be hinged on trade.”
Housey told investors to be careful with the prevailing narrative—there is a global synchronized slowdown. Based on his discussions with corporate CEOs, they are waiting to see the rules on trade before they act. Once there is a trade deal with China, it’s going to act like stimulus, as all of the capital that is being withheld comes back into the economy.
As that happens, the dollar will weaken, boosting commodities and high yield—an area he does not see as being in a bubble. Tens of billions of dollars has flowed out of high yield in recent years, evidence of a lack of euphoria in the space. On top of that, default rates are at less than 2%, making high yield compelling.
Housey added that, bank loans, which have similar yields as high yield but are higher on the capital structure, may be even more appealing based on valuation.