Fixed Income in a Late Cycle: When Carry Is No Longer Enough

Business Times article: https://www.businesstimes.com.sg/wealth/juiced-out-bonds-pushing-money-elsewhere An article featured in The Business Times highlights a growing challenge for global bond investors - 𝘆𝗶𝗲𝗹𝗱𝘀 𝘁𝗵𝗮𝘁 𝗮𝗽𝗽𝗲𝗮𝗿 𝗵𝗶𝗴𝗵 𝗶𝗻 𝗻𝗼𝗺𝗶𝗻𝗮𝗹 𝘁𝗲𝗿𝗺𝘀 𝗯𝘂𝘁 𝗮𝗿𝗲 𝗶𝗻𝗰𝗿𝗲𝗮𝘀𝗶𝗻𝗴𝗹𝘆 𝘂𝗻𝗮𝗽𝗽𝗲𝗮𝗹𝗶𝗻𝗴 𝗮𝗳𝘁𝗲𝗿 𝗶𝗻𝗳𝗹𝗮𝘁𝗶𝗼𝗻 𝗮𝗻𝗱 𝗿𝗲𝗶𝗻𝘃𝗲𝘀𝘁𝗺𝗲𝗻𝘁 𝗿𝗶𝘀𝗸 𝗮𝗿𝗲 𝗰𝗼𝗻𝘀𝗶𝗱𝗲𝗿𝗲𝗱, i.e. “carry” no longer compensates adequately for duration or credit exposure. 

𝘼𝙡𝙡𝙤𝙘𝙖𝙩𝙞𝙤𝙣 𝙩𝙤 𝙛𝙞𝙭𝙚𝙙 𝙞𝙣𝙘𝙤𝙢𝙚 𝙧𝙚𝙢𝙖𝙞𝙣𝙨 𝙧𝙚𝙡𝙚𝙫𝙖𝙣𝙩 𝙞𝙣 𝙖 𝙬𝙚𝙡𝙡-𝙙𝙞𝙫𝙚𝙧𝙨𝙞𝙛𝙞𝙚𝙙 𝙥𝙤𝙧𝙩𝙛𝙤𝙡𝙞𝙤. However, in a 𝗹𝗮𝘁𝗲 𝗰𝘆𝗰𝗹𝗲 𝗲𝗻𝘃𝗶𝗿𝗼𝗻𝗺𝗲𝗻𝘁, the focus should shift from passive yield collection to 𝗮𝗰𝘁𝗶𝘃𝗲 𝗿𝗶𝘀𝗸 𝗮𝗻𝗱 𝗰𝗿𝗲𝗱𝗶𝘁 𝗺𝗮𝗻𝗮𝗴𝗲𝗺𝗲𝗻𝘁:

𝟭. 𝗦𝗲𝗹𝗲𝗰𝘁𝗶𝘃𝗶𝘁𝘆 𝗺𝗮𝘁𝘁𝗲𝗿𝘀 𝗺𝗼𝗿𝗲 𝘁𝗵𝗮𝗻 𝗲𝘃𝗲𝗿. Broad exposure to sovereigns or high-grade bonds may no longer deliver meaningful real yield. Duration and credit quality now require active oversight.

𝟮. 𝗚𝗲𝗻𝗲𝗿𝗶𝗰 𝗯𝗼𝗻𝗱 𝗶𝗻𝗱𝗲𝘅𝗶𝗻𝗴 𝗶𝘀 𝗹𝗼𝘀𝗶𝗻𝗴 𝗶𝘁𝘀 𝗮𝗽𝗽𝗲𝗮𝗹. Should inflation surprise on the upside causing a reversal of easier monetary policy expected by markets, long duration exposure could suffer disproportionately.

𝟯. 𝗥𝗲𝗻𝗲𝘄𝗲𝗱 𝗳𝗼𝗰𝘂𝘀 𝗼𝗻 𝗱𝗼𝘄𝗻𝘀𝗶𝗱𝗲 𝗺𝗶𝘁𝗶𝗴𝗮𝘁𝗶𝗼𝗻. When the risk of credit deterioration and tighter liquidity increases faster than the potential for additional yield, active participation in the market can help to navigate the asymmetry. Capital preservation, liquidity management, and yield maximisation must be well balanced.

𝘛𝘩𝘦 𝘪𝘯𝘧𝘰𝘳𝘮𝘢𝘵𝘪𝘰𝘯 𝘱𝘳𝘰𝘷𝘪𝘥𝘦𝘥 𝘪𝘯 𝘵𝘩𝘪𝘴 𝘱𝘰𝘴𝘵 𝘪𝘴 𝘧𝘰𝘳 𝘪𝘯𝘧𝘰𝘳𝘮𝘢𝘵𝘪𝘰𝘯𝘢𝘭 𝘱𝘶𝘳𝘱𝘰𝘴𝘦𝘴 𝘰𝘯𝘭𝘺 𝘢𝘯𝘥 𝘴𝘩𝘰𝘶𝘭𝘥 𝘯𝘰𝘵 𝘣𝘦 𝘤𝘰𝘯𝘴𝘵𝘳𝘶𝘦𝘥 𝘢𝘴 𝘧𝘪𝘯𝘢𝘯𝘤𝘪𝘢𝘭, 𝘪𝘯𝘷𝘦𝘴𝘵𝘮𝘦𝘯𝘵, 𝘰𝘳 𝘱𝘳𝘰𝘧𝘦𝘴𝘴𝘪𝘰𝘯𝘢𝘭 𝘢𝘥𝘷𝘪𝘤𝘦. 𝘈𝘭𝘸𝘢𝘺𝘴 𝘤𝘰𝘯𝘥𝘶𝘤𝘵 𝘺𝘰𝘶𝘳 𝘰𝘸𝘯 𝘳𝘦𝘴𝘦𝘢𝘳𝘤𝘩 𝘢𝘯𝘥 𝘤𝘰𝘯𝘴𝘶𝘭𝘵 𝘸𝘪𝘵𝘩 𝘢 𝘲𝘶𝘢𝘭𝘪𝘧𝘪𝘦𝘥 𝘧𝘪𝘯𝘢𝘯𝘤𝘪𝘢𝘭 𝘢𝘥𝘷𝘪𝘴𝘰𝘳 𝘣𝘦𝘧𝘰𝘳𝘦 𝘮𝘢𝘬𝘪𝘯𝘨 𝘢𝘯𝘺 𝘪𝘯𝘷𝘦𝘴𝘵𝘮𝘦𝘯𝘵 𝘥𝘦𝘤𝘪𝘴𝘪𝘰𝘯𝘴. 𝘗𝘢𝘴𝘵 𝘱𝘦𝘳𝘧𝘰𝘳𝘮𝘢𝘯𝘤𝘦 𝘪𝘴 𝘯𝘰𝘵 𝘪𝘯𝘥𝘪𝘤𝘢𝘵𝘪𝘷𝘦 𝘰𝘧 𝘧𝘶𝘵𝘶𝘳𝘦 𝘳𝘦𝘴𝘶𝘭𝘵𝘴.

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