Preparing for the market turbulence that typically occurs in the run up to a recession.
Here are the key takeaways from our latest Fixed-Income Outlook report:
- Every recession since 1970 was caused by the Federal Reserve (Fed) tightening monetary policy too far in response to a decline in the unemployment rate to a level below full employment.
- The market is just now coming to grips with our base case that the Fed will hike once more this year and four more times in 2019.
- We will continue to upgrade quality, position defensively, and remain underweight duration relative to the benchmark, and limit exposure to the short and intermediary parts of the curve in anticipation of higher rates and a flatter yield curve.
- We are seeing late-cycle excesses in many corners of the economy, particularly in corporate credit markets. A sizable wave of fallen angels this big would overwhelm the high-yield market.
- The rise in rates is already hurting activity in housing and autos, two of the most rate-sensitive sectors, as rising rates dampen consumer sentiment.
Important Notices and Disclosures
Investments in fixed-income instruments are subject to the possibility that interest rates could rise, causing their values to decline. High yield and unrated debt securities are at a greater risk of default than investment grade bonds and may be less liquid, which may increase volatility. Investors in asset-backed securities, including collateralized loan obligations (“CLOs”), generally receive payments that are part interest and part return of principal. These payments may vary based on the rate loans are repaid. Some asset-backed securities may have structures that make their reaction to interest rates and other factors difficult to predict, making their prices volatile and they are subject to liquidity and valuation risk. CLOs bear similar risks to investing in loans directly, such as credit, interest rate, counterparty, prepayment, liquidity, and valuation risks. Loans are often below investment grade, may be unrated, and typically offer a fixed or floating interest rate.
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