Bond professionals at Franklin Templeton and some of its affiliates say they expect fixed-income investments to be a safe haven from equities volatility, especially now that the financial markets are showing signs of stress.
“We believed something would break, even before this banking crisis happened,” said Tracy Chen, a portfolio manager at Brandywine Global. “Now bonds provide safe haven protection for people’s portfolios because our timeline for recession is pulled forward because of this banking stress.”
Chen spoke this morning at a webinar on fixed-income mega-trends, entitled “Navigating Rates and Risk.” She was joined by Jennifer Johnston, senior vice president and director of municipal bond research at Franklin Templeton, and Annabel Rudebeck, head of non-US corporate credit at Western Asset.
While the rate hikes of all the central banks have been stressing the markets, Rudebeck said she does not see a full-blown banking crisis.
“The regulation that was put in place after the financial crisis [in 2008] really was designed to provide much better strength on the capital side, and we’re not seeing weakness on the asset side,” she said. “Deposit flight might clearly be a risk for some parts of the sector, and that’s something the authorities are looking at. This presents some nice buying opportunities for credit, especially for some of the higher quality financials.”
The yields that are on offer today—around 5% for corporates—are very attractive compared to the longer-term history and compared with government issuances.
Johnston said the tax-free attributes of municipal bonds provide an extra boost, while the muni market tends to be of higher quality than the corporate market.
“We do see some opportunities, particularly out long, where munis are still relatively cheaper than where they’ve been in the past,” she said.
“This banking stress is very unique,” Chen added. “It’s not driven by credit risk, but by mismanagement of duration.”
From an income perspective, Chen said, she sees great value in favoring the front end of the yield curve as the Fed continues to fight inflation.
“I think the Fed is facing the trilemma of fighting inflation, maintaining financial stability and stable employment. And the market has been so eager to price in a Fed pivot, ever since late last year,” she said.
Chen laid out two scenarios for the Fed meeting tomorrow.
First, the Fed will adjust its policy by isolating the banking crisis with a backstop and a guarantee, while at the same time hike another 25 basis points so Chairman Jerome Powell will maintain his credibility, she said. And second, the Fed will pause.
“Twenty-five basis points is not the point. It doesn’t matter whether they hike or not,” Chen said. “It’s a signal. And what comes after in his comments during the press conference is the critical thing.”
The best bond investment opportunities in the global markets going forward are, according to the panelists are agency mortgage-backed securities, asset-backed securities, credit-repair organization bonds, and commercial mortgage-backed securities; 3- to 5-year durations on the credit curve; and municipal bonds all along the curve.