Joyce Choi is director of fixed income product strategy at BlackRock and a panelist at this week’s Inside ETFs Canada conference in Montreal. ETF.com caught up with Choi ahead of the conference to get her take on the latest developments in the fixed income markets. [Note: This interview took place on Monday, June 17.]
ETF.com: Tell us a little bit about what you’ll be discussing on your panel.
Joyce Choi: Our panel is titled “Fixed Income: Why Uncertainty Is the Worst Thing for Investors.”
To be honest, I’m not sure if that title is necessarily apt, because I certainly think that uncertainty equals opportunity, particularly in trades of volatility.
Most of the points that I’ll be addressing relate to the fact that we’re going to be entering into a potential regime change from a period of global quantitative easing to that of one that’s dominated by geopolitics. I’ll be talking about deglobalization and how it may affect global markets and result in higher headline volatility, causing some price dislocations and creating opportunities.
ETF.com: This new regime of geopolitics you’re talking about, is that primarily due to the trade war?
Choi: Exactly. And not only the direct implications of that, but also the secondary impact of how it affects sentiment, confidence, etc.
ETF.com: The Fed is about to make a big rate decision this week on Wednesday [today]. Market expectations are that it won’t move at this meeting, but that it will move aggressively to lower rates later this year. Is that something you foresee also?
Choi: There were some technical drivers of the bigger moves in the front end of the curve. We do think the market moved a little bit too fast too soon.
However, there could be one or two rate cuts in the pipeline, depending on how the economic data points play out. They’re going to be biased for more downward cuts from here.
ETF.com: One thing I find interesting is that last year there was a lot of chatter about interest rates going up. There was this expectation that they would continue going up and normalize back to where they were before the financial crisis. But it seems that whole scenario is out the window after what’s happened this year. Are 2% Treasuries the new normal?
Choi: The front end of the rate curve is certainly telling you that the Fed is likely to cut rates from where we are today. There’s probably about 90 basis points of rate cuts that are priced in for 2019 and 2020.
If you translate that into the effect on the two-year and 10-year, that suggests we’re going to see lower rates for longer.
ETF.com: One piece of advice I heard a lot last year was investors should shorten the duration of their fixed income holdings because of rising interest rates. With the outlook for rates completely turning around, is that advice no longer valid?
Choi: Last year we did see fairly heavy inflows into the short end of the curve and short duration ETFs. Conversely, this year, we’ve actually seen flows into the long end, whether it’s the Treasury 20-year-plus or even the seven- to 10-year. So clearly, the market is looking toward extending that duration.
This plays out with the idea of duration as a hedge to a portfolio. Risks certainly do look asymmetric at this point, just given the rally that we’ve had year-to-date in risk assets. I think it’s prudent to take some chips off the table here. Preserve your returns and use that extension in duration to help protect your portfolio in the second half of the year.
ETF.com: Aside from extending duration, what other general advice do you have for fixed income investors?
Choi: We advocate having some broad fixed income exposure to provide the duration that you need in a multiasset portfolio. It provides a hedge and carry that’s vital, particularly in these times of volatility.
That said, we’re not necessarily ruling out high yield debt. We see tactical opportunities within emerging markets and high yield. Fundamentals are still fairly solid. Our base case isn’t that we’re going to head into recession in the U.S. anytime soon, so corporate fundamentals should remain fairly stable from here over the next 12 months.
With the increased volatility and resulting price dislocation, there may actually be opportunity to go long high yield and emerging market debt.
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