Strategy Update: Fixed Income

Genevieve Signoret

(Hay una versión en español de este artículo aquí.)

Last week in our sister blog, Timón Económico, we wrote that we had revised up to 60% from 55% the subjective probability we assign to our central scenario, in which the United States enjoys a soft landing rather than sliding into recession. Here, we begin a three-part series in which we update you on our consequent portfolio strategy adjustments.

Client portfolios hold long-duration U.S. Treasury bonds as a hedge against our recession scenario. But they no longer hold any cash, thus lean more heavily than before toward risk assets. If our soft landing case does play out, in months to come, our risk asset holdings will appreciate further still.

To hedge exchange rates, our portfolios also hold sovereign bonds from additional developed markets—Japan, developed Europe, Canada, Australia, and New Zealand.

All our bond holdings are now “nominal”, meaning they offer no protection against inflation. Because we expected disinflation and that, therefore, inflation expectations generally would continue to drop, we closed our positions in inflation-protected bonds a few months back.

We’re nimble, responsive to incoming data. So far today, our expected next moves are as follows:

• Put more weight on non-U.S. sovereign bonds. Today, in fixed income, we overweight the U.S. dollar to hedge against catastrophe. With a more agnostic forex positioning, we can express our having become a tad cheerier.
• Extend the average duration of our U.S. bond holdings in light of our growing confidence that the Fed will lower rates in 2024.