Speaking on a recent episode of the Relative Return podcast, Owen Murfin, investment officer and institutional fixed income portfolio manager at MFS Investment Management, said investors should consider shifting from cash to bonds, as holding cash will likely be less beneficial moving forward.
Murfin further explained that bonds have the potential to perform well regardless of whether the economic landing is soft or hard.
“Our advice to clients is to see opportunities certainly in having duration in your portfolio, sort of extending from cash to having more longer maturity bonds. That protects you from that sort of hard landing scenario,” he said.
“But in a soft-landing scenario, that’s also pretty good for duration because it probably means inflation is coming down sufficiently to give the central banks the cover they need, to cut interest rates and duration works pretty well.”
Murfin also highlighted the synergy of the duration trade with high-quality carry instruments, pointing out: “We think that a high-quality carry comes from areas like investment grade bonds, where the technicals and fundamentals are very good”.
“There are also areas like in the US, securitised markets are pretty attractive. High quality CLOS, for instances mortgages, to us make a lot of sense. And despite all the noise around the French elections, there are some good quality sovereigns to own in Europe. So here we’re thinking about countries like Spain, where we think, given that it trades at a spread to Germany, still looks pretty attractive here,” he said.
Murfin underscored fixed income as “a very good active asset class”, highlighting the advantages of active management amid “hugely differentiated monetary cycles around the world”.
“The Japanese are raising interest rates at the moment at a time when the Swiss, the Swedish, the Canadian central banks have actually been cutting rates. So active managers can take advantage of this variation in monetary cycles around the world and try and take advantage of that,” Murfin said.
“But the other thing is that while things are calm at the moment, there is a very feasible scenario of a hard landing. So positioning yourself in the right sectors and the right asset classes can really add value to portfolios here. It’s not a time to be complacent.
“Monetary conditions are very restrictive. The chance of recession is still reasonably high, and probably more than we say that the market is pricing in. So, security selection and sector selection is an incredibly important way, we feel, to outperform benchmarks in the next three to five years.”
Murfin emphasised that clients are currently holding “probably too much cash” and opined that signals from the Federal Reserve, indicating that the US has reached terminal rates, should bolster confidence in fixed income.
“What I would say though, is that waiting on the sidelines to have full confirmation that inflation is falling and central banks are cutting rates probably means you might lose some of the returns, because often, markets anticipate things happening and by the time things are happening, they’re already priced in,” he said.
“I think that gradual adoption of moderation in your portfolio makes a lot of sense.”
To hear more from Murfin, click here.
