Despite high anxiety about the Fed and Greece, we see good opportunities to add value in fixed income over the balance of the year, particularly in spread product. This view coincides with a high likelihood for positive returns over the second half of the year, especially for the higher-yielding sectors, such as hard currency emerging market and high yield corporate bonds.
With the decline in rates having come this far, the interest-rate outlook going forward is more symmetrical as the markets wait for the Fed's dots to settle. However, given the current monetary and fiscal backdrop and a global economic environment characterized by moderate growth and very low inflation, we remain generally optimistic on the fixed income markets and continue to see a wide range of opportunities to add value through active management.
Although the U.S. recovery will enable the Fed to raise rates in 2015, long-term rates in the U.S. and other developed countries are likely to remain low and rangebound. Spread products—especially the higher yielding ones—may remain volatile, but should outperform governments by significant margins over the intermediate to long haul.
If investors looked no further than the 0.2% return on the aggregate index or the rounding error 4 basis point drop in the yield of the 10-year U.S. Treasury note from 2.53% to 2.49%, they might be inclined to dismiss the third quarter as a non-event. In fact, the quarter was rife with significant events likely to impact markets in the quarters–and perhaps years–to come.