OPINION | Harnessing the power of duration By Ed Perks READ:
The US Federal Reserve’s singular focus on controlling inflation last year resulted in an aggressive cycle of rate rises, which in turn tightened financial conditions, leading to a sharp rise in yields and spreads on fixed income assets.
Moving forward, our allocation decisions will be driven by what happens with interest rates and inflation this year. We believe the move higher in rates is likely almost done, but we expect a long pause from the Fed before any pivot, meaning our attention will be focused on the effect rate hikes have on the economy and inflation.
Elsewhere, the HY bond sector is, in our view, more resilient than many investors believe, absent a significant negative impact on corporate earnings. Most HY issues won’t need to be refinanced in the next few years, and therefore a recession this year with a modest pullback doesn’t overly concern us.
In our opinion, equity-linked notes offer a way to manage this uncertainty, while expanding the universe of stocks available for investment. ELNs enable investors to derive income from exposure to equities that offer little or no dividend and can be used in conjunction with common stocks to access both yield and price upside potential. These instruments can also be used to smooth volatility and hedge exposure.
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