D-cipher: The role of fixed income in light of the 3D Reset

In our latest D-cipher video, we discuss how the trends of deglobalization, decarbonization and demographics are impacting fixed income. In this new investment landscape, bonds offer a compelling investment opportunity.



Neil Sutherland
US Multi-Sector Fixed Income

In this new market environment, the role of fixed income has evolved, and bonds are once again fulfilling their historical role of providing income and portfolio diversification. Bonds have been a tough sell over the last decade but now present the best opportunity in several years.

Nominal yields are currently near the highest levels seen in the past decade and are in the top quartile over the last 20 years. Bonds look cheap not just to their own history but also relative to other classes. We believe this presents a significant income and capital appreciation opportunity that hasn't been seen in a long time. The favorable valuation backdrop, moderating inflation and a less activist Fed have the potential to provide significant tailwinds for fixed income returns.

Looking at previous hiking cycles, yields have historically peaked around 12-18 months after the first rate hike which happened in early 2022. Bonds historically also rally for over a year after the first cut. This pattern supports our view that bond yields have already reached their peak and will continue to decline this year as economic growth slows and the Federal Reserve starts cutting rates, which the market expects to begin this summer. This presents a great opportunity for capital appreciation.

Now, let's discuss the specific impacts of the 3Ds on bonds. First, deglobalization could lead to shorter supply chains, which will increase costs and create new financing needs. We believe this will create opportunities for specific issuers and sectors across the industrial spectrum. Macroeconomic implications could be inflationary and will require a more activist Fed. Additionally, implementing decarbonization programs will require significant resources with estimates in excess of $100 trillion by 2050, leading to structurally higher inflation. Debt capital will be needed across various sectors and industries, resulting in issuer-specific opportunities. Lastly, changing demographics, such as a smaller working-age population, could lead to higher wages.

All these factors create a less favorable trade-off between growth and inflation. In contrast to the last decade, our view is that central banks will no longer be able to slash interest rates when confronted with any period of economic weakness.  This could mean we are likely to experience shorter economic cycles and higher volatility in this new market environment. Investing strategies which worked in the previous decade are unlikely to work in the coming decade.

In summary, the 3Ds could contribute to structurally higher inflation, increased Fed activism, and greater dispersion among sectors and issuers. We believe there is a significant opportunity in fixed income currently. Active managers with the flexibility to adjust risk levels and opportunistically rotate between sectors may be best positioned to capitalize on these opportunities.

To read more about our fixed income views, click here.


Neil Sutherland
US Multi-Sector Fixed Income


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