Fixed Income Outlook – September 2023

“One must choose in life between boredom and suffering.”

~ Madame de Stael


Often, the market is an exciting place for investors. There’s always something happening, a new idea to explore, or an old lesson to relearn. Despite transitioning into a new regime of higher inflation and an impending global recession, fixed-income markets have been boring. So should investors seek change? Or should they learn to cope with boredom?


High Inflation

Every Central Banker is worried about inflation. The Fed clearly believes that the worst is not over. The RBI raised its inflation estimates for the year. While nobody is talking about the Ukraine war, inflation is still a cause for concern.

When inflation is persistently high, the old formulas for investment success don’t work. So, all investors must look beyond an arsenal of fixed income and equity to battle inflation. With its lacklustre performance, gold does not present a compelling case.


Flat Yield Curve

The Indian Government Bond yield curve has been flat for a while now. Duration calls don’t promise massive gains anymore. Credit spreads are also narrow. The idea of sticking to moderate to high-quality short-term debt sounds like an endless echo.


Global Recession: Are We There Yet?

The inverted US yield curve has been around long enough to make investors yawn at the idea of a recession. Even the Fed is more worried about reining inflation in than about an economic slowdown. A recession seems more like an afterthought to tight monetary policy.

Does the US stock market t reflect the sentiments of a country facing recession risks? Since the start of the year, the S&P500 is up more than 15% this year and the NASDAQ nearly 35%. Shouldn’t we worry that markets are factoring in only the good?


Choosing Boredom Over Suffering

The only thing investors can do now is to choose boredom over suffering. To be bored in this market means:

      1. Avoiding duration exposure in fixed-income strategies
      2. Buying the dips in precious metals
      3. Being wary of hot investment ideas
      4. Preparing with liquidity

Suffering will come to those who try to get ahead of the market. Duration calls will hurt as interest rates take longer to fall or the yield curve changes shape. Inflation hedges are long-term investments. It takes time to build positions. Just like it takes time for inflation to return to normal. Even in this market, there’s a frenzy around small caps and global investment ideas. Before getting in, investors must chart out their exit plan.

There’s always hope. Eventually, opportunities will get interesting. In the meantime, stay prepared with liquidity.

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