Three Ideas for More Resilient Fixed Income Portfolios
Seek Relative Value in Rates
Central banks have returned to Great Financial Crisis (GFC)-era monetary stimulus tools to reassure the market and inject much-needed liquidity. While the COVID-19 global pandemic is unprecedented, the policy responses are similar, and insights can be gleaned from the past. Following the GFC, inflation began increasing as a result of the stimulus measures – averaging 2.4% from 2009 until 2012 – after a demand-driven deflation shock began in 2008. One could reasonably expect the same trend today – given the potential for the price tag of the monetary and fiscal stimulus plans (approximately $6 trillion)1 to fuel an economic rebound2 later in the year, once the COVID-19 curve has flattened. Therefore, investors may consider potential relative value opportunities in the rates markets, swapping nominal US Treasuries for inflation-protected Treasuries – legging into the trade over the next quarter, as data have yet to reflect the demand-driven deflation shock.