Callan conducts a quarterly survey of select fixed income managers to gauge their sentiments about the current market environment and solicit their near-term outlook (6-9 months) on key issues such as Federal Reserve rate hikes, inflation, and other factors that affect bond portfolios.
In our most recent survey, for the first quarter of 2019, we found that the outlook for fixed income managers has notably changed compared to the last quarter of 2018. Market volatility has increased, and few managers believe that trend will reverse anytime soon. Fixed income managers have taken up active risks in their portfolios, albeit opportunistically as many continue to believe the U.S. economy is in the later stages of this economic cycle. Geopolitical uncertainties and fiscal/monetary policies have become more difficult to handicap, and now many managers have reduced these lower “information ratio” positions in order to focus on sector and credit selections. (The information ratio is a risk statistic that measures the excess return per unit of residual “non-market” risk in a portfolio.)
Among the other highlights from our survey:
- The expectation for Fed rate hikes diminished from 2-3 for 2019 to only 1 (32% of respondents) or 2 (28%).
- Relative duration positioning became more muted as global uncertainties rose. The number of managers with a neutral stance increased the most from 7% in the fourth quarter to 31% as both over- and underweight managers reduced their relative weights almost evenly.
- The outlook on the shape of the yield curve shifted considerably. Last quarter there was a strong view that the curve would get flatter; this quarter the outlook was far more mixed with no clear direction.
- Corporate fundamentals quarter-over-quarter were notably weaker as uncertainties and the global slowdown may moderate capital expenditure spending. A tougher year-over-year comparison on earnings growth and continued U.S. dollar strengthening may further erode fundamentals and consumer confidence. That said, Fed Chair Jerome Powell’s reversal to a dovish stance leaves room to add risk as a pause in rate hikes eases funding pressures, since refinancing borrowers would have faced higher costs if the Fed had continued hiking interest rates. Survey results showed an uptick in improving sector outlooks, but that may be a function of favorable valuations from wider spreads rather than expectations for stronger earnings growth.
- The widening of credit spreads has made valuations more favorable compared to a couple of quarters ago. Volatility has increased, and few believe that trend will reverse anytime soon.
