What Oh says he can see

When Steven Oh, Global Head of Fixed Income at PineBridge Investments, talked about the economy, interest rates, and inflation, I listened. It was January the 24th, and everyone was feeling fine. Oh was guest on Bloomberg radio and podcast. 

The area of bonds is very hard to understand. He was very fluent in bonds. I took note.

The world was expecting a time when the Fed would move to a new normal for interest rates. What was a surprise was that inflation was so strong, and the rate raising of the Feds and other Central Banks was to be so aggressive with rates to stop inflation.

“Entering 2022 .. fixed income was largely unattractive, given the fact that duration was extended, yields were very low, and there just wasn't much upside and we were recommending that fixed income be reduced in portfolios,” Oh said by way of background. Today there is more yield in fixed income, which is positive for many investors. 

“I would say a combination of factors could result in higher levels of treasury volatility. It's not only that component. Volatility has risen significantly, as the buyer bases diminished overall. And we've seen that even without any of these up in the course of the past year, but again, any type of volatility that results in yield spiking up would be more of a buying opportunity because it's hard to see a scenario where that lasts for any period of time,” he said.

What’s in store in 2023? Oh is not expecting fixed income to produce tremendous returns in a rebound, nor is he expecting to go back to ultra low rates, tho he admits that is “out of consensus from the market.” The Fed will not cut rates later this year, but the market is pricing that in.

He said yields have peaked last year. So risk in fixed income is reduce, while coupon clipping becomes the order of the day. Coupon clipping is interest taking I it harkens back to a time when fixed-income securities came printed with attached coupons. Most of the price action that may have been anticipated has already played out in the first three weeks of the year, Oh said. He favors a barbell approach to divvying up bond holdings. During his appearance he also discussed recession (it’s possibility is not priced into the market), and the Ukraine War (a peaceful resolution and outcome again, which his firm is predicting, would be a happy event for a big part of the world, but it “represents a risk that you could have a tremendous rally in the markets” and fixed-incomers would be unprepared, having inadequate level of risk taking in portfolio. – B.B.

https://www.bloomberg.com/news/audio/2023-01-25/markets-bonds-energy-and-earnings-podcast