What should bond investors do when rates are rising and the credit cycle is ending? Perhaps not what you would expect. But getting this right can be critical for the health of your fixed-income allocation.
It’s human nature to want to protect your portfolio when the market takes a sharp turn. But too often, bond investors make the wrong choices when interest rates rise and credit cycles end. This can have disastrous consequences for returns.
The US corporate credit cycle is nearing its end, and the cycle in parts of Europe isn’t far behind. This can create treacherous conditions for unprepared investors. The first line of defense, in our view, is knowing what to expect.
Is the end of quantitative easing (QE) a big deal? Might tax reform provide an added boost to the US economy? Should investors brace for more volatility in 2018? Yes, yes and yes.
2017 was supposed to be the year that would put an end to modest growth, lukewarm inflation and anemic bond yields. It didn’t live up to the hype. But pressures are building, and that means volatility ahead—as well as opportunity.
At 10 years and counting, the US credit cycle appears to be nearing an end. Could a sweeping rewrite of the tax code keep it alive a little longer? Maybe.
After a relatively quiet third quarter, bond markets are ripe for some volatility and bigger waves as major central banks begin to unwind quantitative easing. For global bond investors, that could lead to new opportunities. But for now, with valuations in many sectors stretched, it pays to be selective.
Today’s low bond market volatility won’t last forever. But knowing whether a correction will come next week or next year isn’t so important. Having an efficient trading strategy that can execute in both tranquil and turbulent markets is.
Preparing for a stock market correction? We’ve got another thing to add to your to-do list: take a look at your fixed-income holdings, too.
Investors who want to reduce risk and maintain a steady income might consider a barbell strategy that pairs interest rate–sensitive bonds with high-yielding credit assets. But first, it’s important to strike the right balance.