Group CIO Dan Ivascyn discusses how fixed income has the potential to offer lower volatility, greater resilience, and better relative value to equities at a time when risk assets look more expensive. Learn more about where we’re seizing opportunities today.
Recent data paints a surprisingly resilient economic picture. Can you share our outlook for interest rates in the global economy and what risks we’re monitoring?
Dan Ivascyn: So, the bottom line is that the markets have been romancing a no landing scenario or a soft-landing scenario. We think that’s increasingly embedded in the pricing of risk assets and given some pretty significant geopolitical uncertainty, the fact that there’s been a lot of tightening that’s occurred thus far, that monetary policy operates with considerable lags, we don’t think we’re out of the woods yet.
We still think that there’s at least a chance, maybe a decent chance still, of ultimately a recession or some period of weakness in order to get inflation back down very, very close to central bank targets or perhaps even at central bank targets.
Kim Stafford: How should investors think about the trade-off between stocks and bonds given the economic outlook you just described?
Dan Ivascyn: Yeah, so you’re absolutely right, stocks and other riskier areas of the investment opportunities set have performed very well the last few months. But when we look at the stock market today, we see pretty high multiples, pretty low equity risk premium in a historical context in this macro uncertainty.
We do think that there’s a bit better value within the fixed income markets, even some of the credit markets. Stocks have been doing well more recently while interest rates across much of the yield curve have gone higher or bond prices have gone lower.
So that relative value proposition between bonds and stocks has only gotten more attractive. So we think, again given this uncertainty, not only can you get attractive relative returns in fixed income, but much more predictable returns as well.
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