Figure 3: Treasury Yields Were Range-Bound For 20-Years Last Time They Hit Bottom

Era Of The Bond-Picker

In our view, a bond-picking strategy would be the most attractive for navigating such a range-bound Treasury market. Beta strategies would simply ride the ups and downs.

Bond pickers can focus on certainty of repayment and compensation for risks. This can help navigate uncertain market environments. These strategies aim to turn bouts of volatility to their advantage as they usually prefer to take profits in richly-valued markets and pounce on market sell-offs as if hunting for the best deals in the holiday sales.

A bond-picking strategy needs to be sufficiently nimble, however. It is somewhat capacity-constrained making it harder to execute with particularly large pools of capital.

The Time To Position For Uncertainty Is Now

U.S. corporates are already dealing with the uncertainty of a changing world. Protectionism is on the rise, weighing on manufacturing sentiment. On the plus side, however, corporates are benefiting from a healthy domestic consumer.

How can an investor separate the adversely exposed from the well-insulated? The best answer once again, in our view, is through security selection. Already, we feel it is a preferred strategy to a beta-driven approach over both the short and the long term.

One thing we simply can’t afford to do is expect the trends of the past to reflect the future. For that, our way of thinking needs to change.