By Gene Tannuzzo, CFA, Global Head of Fixed Income
In this video Gene Tannuzzo, our global head of fixed income, discusses a shift in the market’s focus – from interest rate to credit volatility.
Transcript
Gene Tannuzzo: I think 2023 will be a year where the market transitions from being focused on interest rate volatility to being focused on credit volatility. Last year was all about interest rates rising very quickly because the Fed was adjusting its reaction function. That has now happened, and we’ve seen volatility manifest itself in credit markets starting in the first quarter in the banking sector.
We think throughout the course of the year that volatility will permeate through other industries and credit selection is going to be absolutely key to performance.
The diversification benefit of bonds has dramatically changed in 2023. Importantly, we’ve seen that in environments of risk aversion, when equity prices are going down and credit-sensitive sectors of the bond market are performing poorly, high-quality fixed income is doing well and Treasuries are a strong diversifier to other risk assets. That’s important and has been a reliable diversification benefit of bonds over time, but it was sorely lacking in 2022. We’ve seen that return in 2023 and from a portfolio construction standpoint and a diversification standpoint, we think that’s incredibly important.
We think opportunities are vast in 2023, but investors need to be selective. Credit risk will be paramount. We do think in the riskiest sectors of the market, defaults will increase as economic growth slows. However, yields are higher. That cushion for volatility is substantial and we think high-quality credit is very, very attractive in this environment. That would include areas like investment-grade corporate bonds or investment-grade mortgage-backed securities.
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