Investors need to be cautious when seeking yield, and should consider keeping a ‘cash cushion’ in their portfolio given the current economic climate, warns Eaton Vance.
The low rate of growth globally, as well as the use of negative interest rates in many countries, has created a “brave new world” for investors, said Eaton Vance co-director of diversified fixed-income, Kathleen Gaffney.
Given these circumstances, investors need to ensure they are not “stretching too far” for yield.
“Investors have to be extremely careful about chasing yield today because there just isn't a lot of value in popular income-producing segments of the market,” she said.
The unprecedented involvement of central banks in the economy has meant investors should maintain a diverse portfolio, including a cash cushion.
“Now is a great time to own a little bit of everything – including cash; keeping some dry powder makes sense at this time,” she said.
Most central banks “seem to be pushing on a string” and additional policy measures are doing little to promote growth, according to Ms Gaffney.
“In this environment of low growth, monetary policy is not enough – it needs to be paired with government action and public spending,” she said.
While corporate bonds and floating-rate bank loans still represent “pockets of opportunity” for investors, Ms Gaffney noted that risk/reward for developed market government bonds is still skewed to the downside.
“We are definitely in uncharted territory, and I believe it's unsustainable," she said.
“Looking at 10-year government bond yields in developed markets, it's remarkable that the US is viewed as the high yielder at less than 1.6 per cent."
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