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A focus on fixed income

What to expect after 2018.


As we near the halfway point of 2019, steady and stable is the name of the game following the wild ride in the last quarter of 2018. Last year was challenging for fixed income, which experienced its first year of negative returns since 2013.1 Manulife Asset Management’s Chief Investment Strategist, Philip Petursson, and Dan Janis, head of Global Multi-Sector Fixed Income at Manulife Asset Management, weigh in on the events of the last part of 2018 and their outlook for fixed income in 2019.

Do you believe the worst is behind us for fixed income?

I strongly believe that the worst for bonds is behind us. Pointing to the cyclical nature of rate increases and indicators from the U.S. Federal Reserve, this might be the conclusion of the rate tightening cycle in the United States, with similar action by the Bank of Canada.

US 10 and 2 year yields 2016-2018The Bank of Canada appears to be acknowledging the same and is anticipated to pause on any further rate increases this year. Canada is facing a weaker economic environment from a consumer starting to feel the bite from rising interest rates coupled with high debt levels. Continuing low oil prices and a weakening housing market are also contributing to the overall weakness in the Canadian economy.

There are belt-tightening indicators that can’t be ignored. Following 10 years of record-low interest rates, this is the first year that anyone renewing a five-year mortgage will have to pay more since 2012 or 2013. That is going to have an effect. We’re also seeing weaker auto sales2 and weaker retail sales.3 Consumers are sending a message that they are tapped out. Any interest rate increase at this point would just lead to a greater deterioration of the economy.

What will that mean for bond investors through 2019?

I think this will be a year of solid positive performance for the fixed income sector, leaving bond investors with a positive return through the full year of 2019. My team thinks that investors can look to fixed income again as that defensive position in a portfolio that may generate modest to moderate income over the course of the full year.

What is your forecast for interest rates?

I don’t expect to see interest rates move up as much in the next 12 to 24 months as we have in the last 24 months. Credit spreads that had widened out are not expected to widen out much further. We are also now in an environment where interest rates are higher, offering investors a more attractive yield than we saw last year – a yield sufficient to absorb any further interest rate increases.

Do you believe the worst is over for fixed income?

I think the worst of the bond bear market is behind us, and I’m taking a glass-half-full approach, remaining pretty positive about future outcomes. We’ve had an interesting confluence of events, including political risk and trade risk, but the major contributors to this volatility have eased off.

From a global view, we do need to be mindful of the fact that not every central bank is at the same stage of its own interest rate cycle. The U.S. Federal Reserve is closer to the end of its rate hiking cycle, but there are other major central banks around the world that are just starting to normalize. How far will they go? That’s still the question.

What’s catching your attention in 2019?

I’m highlighting emerging markets such as Indonesia and the Philippines with opportunities for getting yields of 4.5% to 8% on a five-year bond despite some currency risk. But, as a team, we’re okay with the currency risk and managing that aspect. I think there could be opportunities in Italy, Portugal and Spain. We need to solve the Italy budget dilemma, but there could be some nice technical and tactical trades in those types of bonds from a short-term perspective.

How are you managing through short-term volatility in 2019?

Economic slowdown from political instability, trade war concerns, overextended corporate balance sheets or a slowing housing market could eventually lead to recession, with economist predictions of anywhere from a 30% to 50% probability rate by 2020.4 Having a global team of senior portfolio managers to ensure investment stability is a key Manulife advantage.

When someone trusts us with their money, I want them to have the assurance that there’s always a set of eyes watching the portfolio 24 hours a day. To ensure that happens, the Global Multi-Sector Fixed Income team has a large footprint, with senior portfolio managers located in Boston, Toronto, London and Hong Kong.

We are talking with our senior portfolio managers multiple times a day – looking for opportunities and weighing risks. Things can happen very quickly, and it’s valuable to have this global reach to get that first-hand information. We are an experienced team of all ages that looks at every opportunity and situation from a variety of viewpoints.

Looking ahead

There’s little doubt that 2018 was a really tough year for fixed income. But with rates high enough to offer investors an attractive yield and potentially provide a positive return in 2019, it’s time to look at how Manulife’s fixed income lineup can help ensure portfolio stability for your clients.

To learn more about Dan Janis and the funds he manages, listen to his appearance on Investments Unplugged on iTunes or manulifeinvestmentmgmt.ca