By Joel Kranc
Meet the new boss, same as the old boss.
The 2024 bond outlook has a lot to do with many of the market and other geopolitical forces that were plaguing the globe in 2023. High interest rates have become the norm (and have somewhat stabilized) with continued high inflation and market volatility. In Canada, a published interview with PIMCO economist Tiffany Wilding noted that she sees a continued week economic outlook in 2024 and a potential mid-year cutting cycle from the Bank of Canada.
And that seems to be an agreed upon view by many in the market. Zachary Barsky director of Institutional Client Portfolio Management with Toronto-based RPIA, says there is anticipation of rate cuts. “Some people were saying in March or April. We think a cut earlier in the year is a little bit too optimistic given some of the inflation and employment data that we’re still seeing. When the first cut will come, the magnitude of the rest of the cuts for the rest of the year are really what’s driving the entire market right now from a fixed income perspective.”
He adds that a prudent strategy going forward is preparing for the worst and hoping for the best. “We are opportunistically increasing duration in our mandates that have the opportunity to do so,” Barsky says. “But we remain very cautious because ultimately nobody knows what the [heads of the central banks are] thinking right now. So there is certainly the expectation of more volatility. It’s not going to be linear, and it’s not going to be smooth and easy.”
Where to next?
According to an RPIA credit market analysis, while the highest inflows of assets in 2023 was in money market funds, the second highest was fixed income, with an inflow of $196 billion, as of September 30,2023.
Barsky explains that the consensus is that the next move will be down rather than up. If the next move is down rather than up, extending duration could become a winning bet.
Yusuke Khan, Canada Investments Leader with Mercer Canada, says each investor, especially those who have liabilities that are tied to interest rates, should take a step back in refreshing their assumptions.
“In some of these assumptions, it can move pretty quickly from quarter to quarter. And in September, it was a very different picture when rates were spiking compared to perhaps the mood today. So conducting analysis and stress testing some of the assumptions, we think, is going to be very beneficial for most investors to undertake at this time.”
Interestingly, in a survey conducted by Mercer last June, 38% of DB plans said the will make no change in Canadian Public Investment Grade Fixed Income investments. “I think the takeaway here is that it isn’t the one-way street, says Khan. “We think clients will benefit from taking a step back and understanding what role fixed income plays in their portfolio.
He adds that private debt continues to be an area where he sees considerable interest. In the same survey, 26% of respondents said that they were planning on increasing their allocation to private debt.
Despite uncertainty, geopolitical skirmishes, and a changing economic environment, institutional investors can find income within the bond market. Notes Brian Kloss, portfolio manager with Brandywine Global, “I think if you look at institutional investors and you look at the bond map, the bond map still looks fairly attractive [that can achieve a] reasonable type of return. I’m not sure you’re going to get that double-digit return that could have been possible before, but maybe mixed single-digit returns could be possible.”
Achieving that, adds Kloss, requires an active strategy. “I’m not sure we should sit here and have a buy-and-hold strategy,” he adds. “We’re arguing to be thoughtful and prudent and do the due diligence that’s required when you do take spread risk in a portfolio, but you can pick up additional return in those makes.”
