Transcript: As world recalibrates, opportunities emerge in fixed income

Current headwinds facing fixed-income investors.

DR: Well, I think we are caught now kind of between where we left off in Q1 and, obviously, what’s happening with the tariff story. I think the market has been very much trading off of this thematic of a lower-growth profile globally, led by the U.S., but also potentially Europe, China, Japan, emerging markets — really a round-the-world phenomenon. But with tariffs, there is an inflation component to it. And so if we are going to have another inflation spike that is tariff induced, then what does that mean for fixed income? And what does it mean, particularly for the long end of the curve? The short end of the curve, I think seems to be a little more pure in its direction, probably lower yields and a steeper curve. But the back end of the curve — the 10s and 30-year part of the curve — where you really have pension and institutional demand for longer-term duration, asset liability management and matching, people are going to be a little bit concerned if inflation decides to move significantly higher in the next few months because of the realignment of global supply chains and consumers having to pay for goods and services at a higher price level.

Where he sees opportunities

DR: So, I do think there are opportunities in the short end of fixed income. I do think that we will continue to see central banks cutting rates, maybe not in the U.S. per se, but Canada, Europe, Australia, New Zealand, I think are likely. Some emerging markets are likely. And so I think there are still opportunities within the fixed-income space in that kind of two- to five-year tenure of the curve. If I’m wrong about this pivot away from lower growth and towards higher inflation, then really the whole curve probably still represents a decent opportunity in terms of markets. But I do think that pockets of fixed income continue to represent a good opportunity for investors with a long-term view.

Expectations for the North American economy

DR: I think the risks around recalibration and slower growth at a minimum are clearly significantly higher. And some of the major investment banks, have increased their probabilities of a recession in the next 12 months. So, that is definitely percolating throughout the market and through Bay Street and Wall Street. What I’m counseling to investors is that expectations around growth need to be recalibrated lower. Whether that ends up being a technical recession or not, I think is still too early to tell, but if you’re chunking along at 2.5% or 3% real GDP growth, and you have a relatively hard stop, and you slow down to 0.5% or 1% growth, even though technically it may not be a recession, it will feel recession-ish.

And finally, what should fixed-income investors bear in mind in these turbulent times?

DR: A balanced approach and a balanced portfolio over a long-term horizon is clearly the way to help mitigate through these times of economic and market turbulence. There are opportunities for long-term investors, when we see equities sell off significantly, and when we see a potentially big recalibration in how markets are going to function. And within fixed income, if we’ve been operating at a 2.5% or 3% real GDP U.S. growth number, and that number is now going to be potentially significantly lower, that provides a really good opportunity for long-term fixed-income investors and balanced investors as we move into this next phase of the cycle.

Well, those are today’s Soundbites, brought to you by Investment Executive and powered by Canada Life. Our thanks again to Dustin Reid of Mackenzie Investments. Visit us at investmentexecutive.com, where you can sign up for our a.m. newsletter and never miss another Soundbite. Thanks for listening.

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