2017 Q1 Outlook
Looking Ahead in Fixed Income
Over the last few years, central banks have given us a lot to think about in terms of yield curves, positions and fixed income. Steve Locke, Head of the Fixed Income Team, recaps 2016 and his positioning for Q1.
Q1 Outlook: Looking Ahead in Fixed Income
Steve Locke, Head of the Mackenzie Fixed Income Team, outlines his positioning and outlook for 2017.
Central Banks have given us a lot to think about over the last few years with respect to yield curves and positions and fixed income. One of the key attributes of the last few years has been liquidity provisions by other Central Banks, not by the Fed, but in fact, by the Bank of England, Bank of Japan, ECB. The nuances of change around that through 2016 have started the debate about policymaking, in general. Now, the Fed was expected to hike rates and they did in mid-December. And as we look into 2017, they've turned a little bit more hawkish, but not dramatically. So, that's caused some instability in the yield curve in the U.S. It's affecting global markets. As we think about 2017, I think we're going to see a little bit of volatility around the higher end of the yield range we've experienced over the last few years and we need to look at what that policy and implication is for the U.S. dollar and for other credit markets like emerging market credit, high-yield and for investment grade corporate bonds, as well.
It was actually a very good year for high-yield credit investors last year. The first quarter was a little bit rocky through January and February, but then, the rest of the year very much defined by rapid spread tightening across most of the high-yield spectrum, including the commodity areas. As we go into 2017, some areas of the high-yield bond market are a little bit rich, particularly those areas where the yields have come down below 5%. The big BB issuers, some of those credits that are the higher quality-end of the high-yield spectrum, they're reflecting both interest rate risk and credit risks. So, we want to avoid those as look into 2017, but some of the middle market-sized deals are still offering good value and good yield for investors and that's where to focus on high-yield bonds. In loans, we think that's a better risk-adjusted return potential for 2017. So, we're overweight loans compared to high-yield bonds in a Core Plus portfolios.
Well, we've had shorter durations in our portfolios. In particular, we've sold 30-year duration out of our portfolios, in general, because we felt there would be a yield rise through the 3rd and 4th quarter. So, that's paid off in protecting our capital for our investors. As we look ahead, we think that investment grade corporate credit offers some value as we go into 2017. Spreads are still wide in that area of the market. So, we're reflecting that in an overweight position in our portfolios. Again, we like loans. So, those are also in our Core Plus portfolios and waiting if it's appropriate for this point in the credit cycle and as we look ahead, we're expecting inflation expectations to remain a little bit more elevated than they've been in the past. We're overweight inflation-protected securities, as well, in our portfolios.
So for more details on our fixed income positioning and our outlook for 2017, please see the January edition of Mackenzie Express.
- Entering 2017, the Fed is somewhat hawkish, causing some instability in the U.S. yield curve, which impacts global markets.
- Some middle market-sized deals offer good value and yield, which is where investors should focus in terms of high yield bonds.
- We expect inflation expectations to remain slightly more elevated than they have been in the past.