Higher Bond Yields Bring ‘Income’ Back to Fixed Income: WisdomTree’s Flanagan
“Unintended consequences” of Fed policy are the biggest risk now, WisdomTree’s head of fixed income strategy warns.
Volatility will likely continue in the bond market, especially when it comes to Treasury yields, according to Kevin Flanagan, head of fixed income strategy at WisdomTree.
Advisors should be communicating that to clients, he says. Meanwhile, for fixed income, he suggests considering the “barbell” approach.
The barbell strategy calls for investors to buy short-term and long-term bonds but not intermediate-term bonds, according to the Corporate Finance Institute. That distribution, on the two extreme ends of the maturity timeline, creates a barbell shape, CFI notes, adding the strategy “offers investors exposure to high yielding bonds with limited risk.”
Via email, we asked Flanagan a few questions about the state of the current market and where he thinks it’s headed.
“My answers are viewed through the bond market lens,” he told ThinkAdvisor.
1. What’s your view on where volatility is headed in Q3 & Q4 and why?
Kevin Flanagan: We expect to see continued volatility in the bond market, specifically as it relates to Treasury yields.
With the Fed being “data dependent,” the Treasury market will be responding to key economic reports as it relates to their outlook on the magnitude of future rate hikes.
2. What are the greatest risks and opportunities for investors in this environment and why?
Perhaps the greatest risks are the unintended consequences of tightening monetary policy: Concerns of a policy mistake whereby the Fed raises rates too aggressively and pushes the economy into a recession.
Higher yields in the bond market have put “income” back into fixed income. Hence, investors may be able to use fixed income for its more “traditional” role in a portfolio.
3. What chance of a recession do you think there is today and why, and to what extent has the (equity) market already discounted a recession?
While percentages vary, 30% probability seems to be a number that is floated frequently.
4. What should advisors be telling clients at midyear?
The investment setting will remain “fluid” in 2H 2022 and the volatility quotient should remain elevated.
For fixed income, consider the time-tested “barbell” approach.