Fixed Income: Liquidity, Uncertainty, and Opportunity

There is still time for the US Federal Reserve to raise interest rates in 2015, but at last month’s CFA Institute Fixed-Income Management Conference in Boston, several speakers noted that “boosting rates for the first time in nearly a decade is hard — and getting harder with each passing month,” as the Boston Globe‘s Beth Healy noted.

Fixed-income investors have been waiting for liftoff on interest rates for a very long time, and could be left waiting for a while longer.

At the conference, Dan Fuss, CFA, vice chairman of Boston-based Loomis Sayles, observed that central banks are giving global economic conditions more weight in their decision-making process. Fuss reviewed the peace, people, prosperity, and politics of the global landscape, and considered the role of central bankers within that topography. Ultimately, Fuss expects that fixed-income professionals will have to deal with low rates and low inflation in an environment where both will rise.

One speaker who saw opportunities to profit from central bank activity around the world was BlackRock’s Rick Rieder. He expects aggressive central bank actions in Europe to lead to opportunities in peripheral countries. Rieder also cited Mexico and Indonesia as emerging market countries with attractive sovereign debt opportunities. Brazil presented more of a puzzle for Rieder, who is convinced that it will eventually be a successful trade, but successful timing remains tricky.

Ronald G. Layard-Liesching, co-founder of Pareto Partners, outlined a darker theory of risk in the global markets stemming from currency exchange. A growing number of public funds, sovereign wealth funds, and ultra-high-net-worth individuals based in emerging markets are trading in US dollars with no interest in hedging their exposures back to their home currencies. Liesching reported that daily currency trading volumes denominated in dollars are now over 140 times the size of the dollar value of New York Stock Exchange. In his view, currency markets and their flows are driving the activity in other markets, which means that currency volatility could have new, unexpected, and entirely unpleasant consequences.

Carl Eichstaedt, III, CFA, of Western Asset Management Company, was more positive, identifying segments of opportunity in credit investing. Eichstaedt saw promise in investment-grade and high-yield bonds in the United States, along with US bank loans, and some emerging market bonds. However, Eichstaedt and several other conference speakers remained concerned about the market liquidity for most bonds.

For more Fixed-Income Management Conference insights, you can review the social media highlights below:

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

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