The Investment Conversation: Keeping the Curve in Context
PODCAST - 2018 Midyear Investment Outlook
The Investment Conversation: Keeping the Curve in Context
In this podcast, portfolio manager Kewjin Yuoh talks about the implications of a flatter U.S. yield curve and uneven global growth for fixed-income markets.
VO: Welcome to The Investment Conversation, Lord Abbett's ongoing podcast series.
VO: Hello, this is Will Andrews, digital media editor for Lord Abbett. What might the rest of 2018 hold for investors? To find out, we recently gathered five of our investment leaders for a roundtable discussion on the midyear outlook. Visitors to lordabbett.com can view related articles and videos at lordabbett.com/midyearoutlook.
VO: With the Fed shrinking its balance sheet after QE, Kewjin Yuoh, portfolio manager for taxable fixed income for Lord Abbett, talks about what might come next after what he calls the "incredible experiment" in monetary policy:
Yuoh: Regarding monetary policy, I think you have to look at the fact that, as far as what's happening to the yield curve, this is what's supposed to happen. When the Fed tightens, the yield curve is supposed to flatten. And if you look at historical relationships, you've been reading in the news about a potential inversion of the yield curve, and how good an indicator that is of a coming recessionâwith somewhat around a six- to 24-month lag. I think if you look at the yield curve right now, you can ask a lot of different questions as to why it's happening and consider different scenarios.
We're at a place where we have just come from an incredible monetary policy experiment. Quantitative easing was something that's never been tried before, and you could point to the fact that in a normal economic cycle, after a recession, it is usually fiscal policy and housing that are the traditional drivers of the recovery. And that's what we're actually getting now. We had quantitative easing come to an end and now we have strong housing technicals with continued home- price appreciation and we've got fiscal stimulus in the form of tax cuts and potential infrastructure spending down the road. What if we are just now returning to a normal business cycle?
People, investors, have been citing that we seem like we're in the sixth, seventh, eighth inning of the cycle but they've been saying that for four or five years now. But we believe that this domestic expansion can continue. Leading indicators are in an upward trend and hard economic data for the United States have remained robust. But the important point here is that valuations in the markets are full. As Rob Lee noted earlier, risk valuations reflect the current environment, and the important question is, can we have even better performance in the years ahead because of robust domestic fundamentals and a strong equity market?
VO: Yuoh outlined the challenges of managing fixed-income portfolios given diverging trends in global economies:
Yuoh: So when we think about the diverging trends in the global economy, I there are a few things you can certainly look at outside the United States. Of note lately, you would look at the emerging markets weakness that has pervaded the markets over the last three months, you look at trade policy which has been so disruptive to markets with its constant headlines, and of course, you look at China, which has been slowing down gradually over the course of 2018 as well. So you have all of this global uncertainty, but inside the United States, within the U.S., the consumer, which is such a large part of the economy, continues to show significant strength. If you look at consumer confidence, retail sales, all of these consumer-related indicators continue to do very well.
And so again, as investors, when we look at risk assets, we ask, how will risk assets perform, or how can they perform, in an environment where you have a bifurcation of the U.S. economy and the rest of the world, and can valuations do better from here in that environment? I think that's a question that we have to answer to position our portfolios correctly. If you look at current valuations, it's already reflected some of that. High-yield debt is doing well, investment-grade corporates have weakened, and that shift has been pretty dramatic. But if you look at commercial mortgage-backed securities, which is mainly focused on domestic commercial real estate, and asset-backed securities, which focuses on the U.S. consumer, they've done very well this year. And so paying attention to that, and thinking about the scenarios where those relationships will change over the coming months, will be very important.
VO: That's it for this edition of The Investment Conversation. As always, you can access a full range of investment commentary and analysis at lordabbett.com. Thanks for listening.
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