Fixed-income investing needs to be strategic as outlook is uncertain, experts say

Investors should make sure they have the right kinds of fixed-income allocations as yields are struggling and several factors contribute to an uncertain economic outlook, a panel of experts said on Wednesday at BNY Mellon Pershing INSITE 2019, in Phoenix.

“My biggest worry is that the cyclical risks that we all know are out there somewhere ... begin to occur faster,” said Matt Forester, chief investment officer at Lockwood Advisors, a BNY Mellon Pershing affiliate.

Forester described a potential “musical chairs” scenario in which investors “move their feet more quickly” to avoid certain risks, thereby worsening the cycle more quickly than expected.

“I think we're getting clear signals from the market” that “you should be reevaluating whether the fixed income that you hold is playing the role that you want it to” in a year or two, when the environment for such investments could experience some big changes, he said.

Tim Urbanowicz, CFA, senior fixed income ETF strategist at Invesco, said “we're in a low-yield environment that is very challenging to generate the yield that clients need,” although “pockets of value” exist.

He emphasized a need to be “more strategic in how we allocate to fixed income.”

Major areas of growth include defined-maturity exchange-traded funds and emerging market debt, with sovereign yields offering “a compelling story compared to what you see in the US and other developed countries,” he said.

Urbanowicz also discussed concerns about growth in the corporate debt market amid low interest rates over the past decade. Leverage ratios and other metrics “have remained in check next to very strong growth and earnings,” but a recession would have implications for companies with a great deal of debt on their balance sheets, he said.

Overall, Forester said, the outlook for investing is uncertain amid a record US economic expansion, with a key question being how much longer the growth will last. There's a “hurry up and wait” stance with regard to how and whether trade disputes, Brexit and other geopolitical risk issues are resolved, as well as how Federal Reserve policy will react to weaker global growth and US jobs data, he said.