How to navigate fixed income
TLT•UBS sees bonds still playing an important role
The Federal Reserve hiked interest rates this week and struck a hawkish tone and markets expect further tightening.
Those expectations are likely overdone even though risks are skewed to the upside, Mark Haefele, chief investment officer at UBS Global Wealth Management, said - but noted the bank does expect another hike in December.
"The median policy rate projection suggests a hold throughout 2027, and we expect steady disinflation over the next six months. Favourable base effects in the first half of next year should also weaken the case for a long sequence of hikes," he added.
Keeping all that in mind, Haefele argues bonds are still an important part of portfolios.
"Higher starting yields reinforce bonds’ role as a key source of portfolio income, while high-quality bonds can provide valuable diversification if economic growth slows," he said.
One thing to consider is "adding duration selectively in high-quality bonds," Haefele said, noting that the recent rise in yield has led to tactical opportunities in medium- to long-duration high-quality bonds emerging.
"Alongside attractive income, these securities have scope for price gains if tighter monetary policy slows growth or reduces longer-term inflation expectations, leading yields to decline," he said.
But, Haefele also suggests avoiding longer maturities, saying caution is warranted "despite compelling valuations over a lack of catalysts for a sharp drop in long-end yields."
