Stephen a pleasure to have initial quite timely of course given that we are
coming off quite a surprise out of the Fed.
Do I want to be near anywhere. The Treasury market right now.
I think you do. As a matter of fact because the
expectations that Powell has laid out significantly increases the probability
of a recession in the next twelve months.
And the implication of that is that treasuries are approaching their peak
levels although the Fed is certainly far from done right now.
And you're seeing that reflected in part by the increase in version of the yield
curve as well. What do you see that the most
opportunities you do look more towards the short end where yields are picked up
substantially higher. Or do you look at more that the front of
the longer end now. I think the opportunity set is really
more on a barbell approach basis first at the short end.
You know you're getting pretty sufficient yields with a roll down
effect. If you're targeting Treasury sort of in
the six months even up to a two year time horizon.
And I believe that there is a element of risk that despite their guidance about
where they expect to head with policy rates next year that they will pull back
potentially more so than they would be more aggressive relative to their
forecasts at this point in time. Conversely I think if you look further
out on the yield curve right now particularly with respect to the kink
into 20 year part of the curve that presents an opportunity as well.
And if the Fed does raise rates to their targeted levels one of the challenges
that they face is that rather than tightening conditions at the back end of
the curve by simultaneously increasing it I think they create conditions where
they back into the curve rallies further.
Seven zip is 60 40 the strategy with 60 being in
the bond market. You know historically for the last
several years even though I represent fixed income our mantra has been that
there is substantial risk and fixed income and investors should consider
reducing their fixed income exposure. I think that equation is changing today.
I think the historical notion of 60 40 is evolving and it's no longer
necessarily what both investors pensions institutions are focused on going
forward. But I think it makes sense now to start
increasing your exposure within fixed income at these elevated levels.
And in particular you know we believe that we are at or near approaching the
peak of this fixed income cycle with respect to where rates are going to be.
Now the challenge is going to be that despite these elevated yields and rates
right now that many would argue that you're still not getting sufficient
returns to offset where inflation levels are today.
But you have to look at the world in terms of the best relative value and
what is sufficient as opposed to what is ideal in terms of your return outcomes
and fixed income levels are now reaching those sufficient levels.
Right. Okay.
So let's dig deeper that into fixed income.
I mean do I move up the credit curve. I mean we've talked so much about
treasuries. What about credit IGF and high yield.
We have had an environment recently where despite the elevated risk you know
ranging from the Fed to geopolitical risk.
Credit markets have been relatively benign in terms of its outlook for
potential recessionary downside risks. Overall we have been starting to see
that shift in recent weeks and credit spreads have widened fairly
significantly. But in looking forward you know where
credit spreads are indicating relative to what the return potential is return
horizon and time horizons are very important.
So I would characterize current spread levels and corporate credit both at the
investment grade level but particularly within the high yield and leveraged
finance component as quite attractive on a longer term outlook basis of perhaps
18 to 24 months. But in the very short term over the next
one to three months time horizon spreads are likely to get cheaper and wider
relative to tighten. So again we would not necessarily
materially increase our credit exposure today but we think that there's value
currently. So very quickly how does the dollar play
into your investment thesis. Well one of the other primary themes of
this year and over the past twelve months has been the dollar strengthened.
And you see that we're DAX ISE. We do believe that the dollar's strength
will persist for the next six months. However after the next six months we
will be reaching a peak and then we will see a bit more of a normalization
because by many fundamental measures the dollar is overvalued and will continue
to get overvalued. And so we see that tide turning.
And so for us what that means is to the extent that currency positions are being
put on portfolios. We would maintain the overweight to the
dollar exposure in the near term but we would start to neutralize that
overweight within the next six months with the view that we would underweight
potentially the dollar there beyond.