Mackenzie Minute: February 23, 2018

KONSTANTIN BOEHMER: Undoubtedly, the rise in government bond yields has been the major event for us on the Fixed Income Team. The move originated in the US where yields increased by over 50 basis points over the last two months. It is partly the global upturn but also the tax cuts in the US, as well as an increase in inflationary pressures, which sparked that selloff. The latest CPI and wage data in the US both came out higher than market expectations, resulting in that reassessment of risk.

The most important event for us on the Fixed Income Team will be to see how the Fed, under the new leadership of [Jerome] Powell, will respond to that increase in inflationary risks. The market is already pricing-in a 25-basis-point hike on March 21, as well as two more in the next 12 months. We expect the Fed to remain with a pro-growth bias and let both growth and inflation run a bit hotter before more actively pressing on the brake pedal by increasing policy rates beyond what is currently expected in the marketplace.

The rise in yields, obviously, is not great for most fixed income markets. For active managers like us, it does offer plenty of opportunities. We have been, and continue to be, active in the duration space where we manage the interest-rate sensitivity of our funds and also where we pick and choose which countries we want to be long or short duration. Similarly, some sectors are better equipped for the rise in interest rates than others. Leveraged loans or also emerging markets have performed extremely well in the latest bout of volatility. So for us, this increase in volatility does offer plenty of opportunities which we aim to take advantage of.