For years, interest rates have remained low compared to historical norms – and well below the current rates of inflation. This in turn has restricted the number of low-risk options for investors seeking yield, often exposing them to longer durations and lower credit quality in search of income.
During our recent City Different Investments introductory call, our portfolio managers Sweta Singh and Chris Ryon discussed their views on how to navigate this income and risk dynamic:
Sweta Singh: Despite the recent uptick in rates, I know the last couple of months, at least for the fixed income market have been very, very interesting. We have been operating in a low-rate environment for a little bit now, much to the frustration of the fixed income investor. And there are two forces at work here. One is of course, the low yield environment. Coupled with that is this narrow credit spread. So what this is doing is it's pushing the investor out on the risk spectrum. So when you're looking at maturity, you're being pushed out to longer bonds, getting exposed to higher duration or longer duration. And then on the credit side, again, not being compensated for this, but going down in credit quality. So buying lower credit quality, again, not getting paid for it. Now, this is a dangerous scenario for an investor, especially when rates and spreads normalize. So we might not always have a symmetrical risk and reward scenario play out.
Chris Ryon: I don't want to seem overly negative on the fixed income market. In a well-balanced portfolio, there is always a position for fixed income. It acts as ballast. So you may change the weights a little bit, but it's very important. The other way to manage your fixed income risk is you simply shorten your duration.