Steve Kane, FED, Bloomberg Global discussed on Bloomberg Markets


There. Boy, it has been a brutal start to the year for fixed income traders. I'm looking at the Bloomberg global aggregate treasury total return index. It's all 15.5%. That's treasuries. I thought that stuff was supposed to be safe. Same thing for the corporate bond index off about 15%. And when I think about fixed income trading, the folks, I think that have been the most conservative slash bearish maybe have been the folks at TC W so I wonder what we should be doing now. Steve Kane, co CIO, and generals portfolio manager at TC W investment management. Steve, is that a fair characterization? Have you guys been more bearish or more conservative about fixed income investing over the last year or two, three than maybe the average bear? Well, we changed our position a little bit over the course of the year. We came into the year defensive. Okay. And now we're getting a little bit more excited. And that's what I'd like to hear. Yeah. And it has been brutal. I mean, to build on what you were saying earlier and maybe just a punctuated, it is the worst market in the history of the Bloomberg aggregate index in the history of that index, which goes back to the 70s. So where we sit today notwithstanding likely higher rates going forward, but we have over 3% treasury yields, four and a half to 5% investment grade corporate bonds, 8 and a half percent high yield. The return profile looks a little more symmetric looking forward. I mean, you've got some risk to it, but you certainly have some return built in too. So I think the way we would sort of characterize it qualitatively is it's not time to go all in on fixed income, but certainly it's not a bad time to increase allocation and that's what we've been doing. Sort of across the board, both our duration or our rate exposure as well as our exposure to mortgages and investment grade corporates. Steve, the wall of worry is very high when it comes to global events right now. Macroeconomic risks sees me. I have to ask though, what do you think is perhaps the number one bull case for bonds right now? Oh, it's simply that the fed almost by design. They won't say this as directly is going to engineer a recession here. And that is simply to fight the inflation dragon. They need to slow the economy down and do so in a way that creates a slack in the economy and the labor market and that in all likelihood involves a recession. So the bull case is really that the fed continues to tighten to the point where the economy rolls over. There's some signs that's happening already. And then the fed has to reverse course. And ultimately, ease, we're not calling for that necessarily in the near term, but certainly looking out into next year and beyond. It's not difficult to see the fed reversing course. So if recession is the bill is the bull case for bonds, does it matter how deep the recession is if it has to be something that kind of flushes out the market, something like O 8 or even the 99 dot com bubble popping type situation or if it can be perhaps a little bit more shallow like 2001, for example, does it matter when it comes to the investing thesis for bonds? Definitely does. And I think that's the debate right now that you hear on your show and others as to what this recession. The discussions move from soft landing to what the recession might look like. And definitely, if it's a deep recession, when great financial crisis type one, which we don't anticipate, that then you get emergency easing like you saw in O 8 and it's also what you saw on March of 2020. It's more likely we do get the shallow version. And the reason is that you don't see the financial leveraging the banking systems very healthy, corporate balance sheets are reasonably healthy relative to past cycles. The consumers in decent shape. So there's not a whole lot of deleveraging and for selling that needs to take place and asset liquidation, if you will in the economy. So it's likely to be a little bit more drawn out, which will put the fed in a bit of a conundrum, so to speak, because if you get a slowdown, you get unemployment building and inflation still staying reasonably high. The fed no longer is it easy just to be hawkish. They will have a dilemma on their hands at that point. All right, Steve, you guys at TC W and for the folks listening and teaching students is monstrous asset management firm based out in LA $225 billion plus and fixed income assets. So you guys see everything out there. To the extent that you are kind of increasing your exposure a little bit here, where do you go? How do you go? Are there certain asset classes within fixed income that you were more they find more attractive now? Yes. And I would describe it thematically for us at least. It's sort of the late cycle playbook, which is you do a few things in this environment. You start adding duration because you're preparing for the turn in the cycle. And then in terms of what you buy, we like to stay high quality, late in the cycle. Because when you head into the recession, high yield tends to go through its default cycle and have significant underperformance. And even though we've seen some blinding, we think there's much more to go in high yield. So for us, it's things like agency mortgage backed securities, which you've heard us talk about before, but the value proposition there is compelling today, given the quality, given the low dollar price, given the positive convexity to use sort of a technical term. Now in the agency mortgage market, investment grade corporate bonds at a 150 off treasuries and again, we can look at a lot of individual issues and sectors of the investment grade corporate market. We think are very healthy from a fundamental standpoint. So broadly speaking, up in quality by investment grade bendable type credit. All right, Steve, appreciate it As always, you guys at TC W are great giving us some insights here on the fixed income space, Steve Kane, co CIO and journalist portfolio manager, TC W investment management. He mentioned that word convexity and my professors down at duke professor breeden and professor Kim Harvey both Chicago dudes like Steve Kane. They love talking about convexity. And I never really got it. So I said, you know what? I'm gonna, I don't think this fixing come markets for me. I'm gonna go be an equity analyst. I just have to tell stories about media companies. It's a lot easier than duration and convexity and stuff like that. But Steve king, he knows that stuff. Let's get out of Washington

Coming up next