Investment Ideas—the Case for Fixed Income in 2024
Stephen Dover, Head of Franklin Templeton Institute, recently sat down with Franklin Templeton Fixed Income Portfolio Manager Josh Lohmeier and Western Asset Portfolio Manager Mark Lindbloom to discuss the fixed income landscape—and why they believe 2024 will be a good year for fixed income investors.
Is now the time to invest in fixed income? That’s one of the biggest questions we get from clients today. For our latest “Investment Ideas” series, I posed this question to two of our leading fixed income portfolio managers, Josh Lohmeier of Franklin Templeton Fixed Income and Mark Lindbloom of Western Asset. Below are some highlights of our discussion:
Soft landing—or something else? The Federal Reserve’s (Fed’s) prior rate hikes are working through the economy, as there are signs of softening in recent inflation, economic and employment data. The market is pricing in as many as four Fed interest-rate cuts in 2024. But will the economy slow enough to warrant this much easing? Mark and Josh were on board with a soft landing as the most likely base-case scenario—marked by a slowing in growth and retreat in inflation—but perhaps not to the Fed’s targeted 2% inflation level. Both portfolio managers agree that the “hard landing” recession scenario seems less likely at present. Contrarily, Josh made a case for a stronger growing economy and pointed to the (surprising) resilience of the consumer supporting the economy on the upside. He also said his team expects just one rate cut toward the latter half of 2024, which is fewer than the market expects. Mark felt more strongly that while not at recession levels the economy will slow as will inflation and interest rates.
Extending duration. While our portfolio managers debated the nuances of the economic outlook, they agreed that the entry point for longer-duration assets looks very attractive today—perhaps the best seen in a decade—particularly if economic growth is weaker than anticipated. That said, there’s still a role for shorter duration and keeping some money in cash as “dry powder” considering volatility. Reasons to begin pushing out on the yield curve include:
- Nominal and real yields appear to be at fair value levels when looking back historically.
- Inflation appears to be falling.
- The high correlation between stocks and bonds in 2022 has lessened this year, so the benefits of a mixture of equities and bonds in a portfolio have reasserted themselves in terms of better balancing risk and return.
- The downside of holding cash is that if rates drop, cash yields will also drop, and so moving into fixed income now allows investors to “lock in” higher interest rates.