A wild week for the markets, with asset classes around the globe seeing swings.
US Treasury yields inching higher on the heels of the latest CPI data, with rising oil prices and the 1030 and 2 year yields climbing several basis points on that CPI print, this volatility could be creating opportunities in fixed income. inflation fears growing due to the Iranian conflict.
The short duration bonds could protect investors if inflation pushes rates higher.
Now there's also growing concern over stagflation, even though US growth figures have been solid and unemployment isn't high yet.
So how are active fund managers Playing this market while joining me to weigh in this morning is Jason Bloom, head of fixed income strategy and Invesco.
Good morning, Jason.
Thank you so much for joining me.
So there are a lot of moving parts here.
So tell us a little bit about stagflation concerns that we're hearing about, especially as oil prices rise.
Do you think these concerns are warranted.
I, I think that the stagflation, uh, phrase is being used a little bit indiscriminately.
Um, the, the definition of stagflation is a combination of factors which includes high unemployment, high inflation, and low growth.
And two of those three don't actually fit the bill.
Possibly all three don't really fit the bill in the sense that we have GDP growth nominally is in excess of 5%.
We have 2% real GDP growth, which is actually a very healthy sort of on trend level of economic growth.
And clearly the labor market is weakened and nobody wants to see that weakened further.
But with unemployment around 4.4%, that's actually very low.
It's not high, that's low unemployment historically.
Um, and inflation is above target, but below 3% inflation also from a historical perspective is nothing like the inflation rates that we saw in what in what were truly stagflationary periods historically.
So I think that people look at the softer employment and the slightly higher than target inflation and think, oh, stagflation, but that really doesn't fit.
This is actually from a growth perspective, a very healthy economy, and in real terms it's growing at a fairly healthy rate.
And it's one of the reasons that that you see the yield curve in the shape that it is and, and a lot of uncertainty about whether the Fed even needs to cut more.
So, so really we see, uh, and I think you kind of led into this, right?
Sorry, uh, short duration, uh, intermediate to short duration is a place where we see a lot of value in the market, a very good risk reward, and then.
Given all of the uncertainty around whether it's tariff policy or geopolitics, we do believe that active managers have a unique opportunity in this market to, you know, buy babies that are being thrown out with the bathwater or sell short term spikes and take advantage of overvaluation, whatever the case may be.
Yeah, and since we just got the release of the latest CPI figures, give us your take on that data point and what do you think the impact is on the Federal Reserve's outlook.
Well, it's never good if you get higher than expected print.
At the same time, it is the slowest annual print that we've seen in a while, so um you have to kind of differentiate between the short term reaction in the market, which is simply based on whether that print hit the uh the average forecast or not, and, and look at the medium to longer term trend.
I, I don't think that any one print really it tends to move the needle.
The Fed tends to look at medium and longer term trends, and it, it is an uncertain backdrop, and as I mentioned earlier, you know, forecasts are that growth is likely to improve this year.
So it doesn't really change in a big way the calculus.
I think it just, it, it, it, it extends the uncertainty over, are we going to get one cut this year or not?
Could the next rate, you know, is the tail risk.
That the next Fed move could be a hike.
Increasing, sure, that tail risk may be increased a little bit today, but you know.
Not, not earth shattering, I guess. of uncertainty out there.
Yes, Jason, I do want to get your take on some of this uncertainty out there and given that we've been seeing the fluctuations in the bond market, what are some ways that investors can actually hedge inflation as well as geopolitical and Fed uncertainty right now.
Right, right, so, you know, if I, if I looked at that CPI print today and thought, well, the risk of inflation is significant this year or, or at least meaningful, um, TIPS, which, which had their heyday in, in 2022 and 20203, um, I think are gonna be back this year as a, a great hedge against inflation.
And of course Treasury inflection and Treasury inflation protected securities, right?
These are bonds that um appreciate as inflation expectations in the market rise.
Uh, they are bonds though, and bonds valuations tend to be hurt by rising rates, so we like short duration.
Tips, 0 to 5 year tips, um, PBTP is an ETF we offer that we think is in the sweet spot there if you're looking for very low risk, obviously issued by the US Treasury, um, and, but also kind of gives the investor a lot of protection in the event that that rates rise as a result of rising inflation and, and even if rates don't rise a lot, it's a, it's definitely uh a nice yield with a sleep at night factor.
And Jason, finally, before I let you go, tell us about the opportunity that you're seeing in fixed income right now.
Yup, yep, um, we have in for, for many years now have tended to favor the short to intermediate duration products as we mentioned, um, this is a higher inflation regime.
Well, we believe it's, it's gonna likely, uh, to, to, to look something much more like.
The time frames prior to the global financial crisis where you have robust growth, uh, but higher than, than higher inflation than we saw in the prior 10 years, which means that um generally higher rates at the front of the curve give you a yield.
With a low duration that insulates you in the event that we see upside surprises and yields, but at the same time growth is high.
So credit, for example, in a stagflationary environment you would expect to see very wide credit spreads because low economic growth is going to really hurt corporate issuers' balance sheets.
That's actually not the case.
It's the opposite.
We have actually Still historically tight credit spreads, corporate credit's performing very well.
Balance sheets are in pretty good shape and so as a result, we like it could be floating rate corporate credit could be which could be high yield or investment grade or short duration corporate credit um where the active manager has the opportunity.
Right, to pivot to sectors that are benefiting or pivoting away from sectors that are being hurt by this sort of tumultuous environment, so GTOS, short duration total return bond fund, is, I think, also another product that we offer in the sweet spot uh of, of where risk and reward sits in the market today.
Jason, we will have to leave it there for today as we are counting down to the opening bell here at the New York Stock Exchange.
So thank you so much for joining us this morning and thank you so much for sharing your perspective.
Thanks, Remy.
