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The bond market is critical for moving credit through the global financial system. So how will global bond markets respond amid today's volatility? How have the first 100 days of the Trump administration changed the calculus? In the first episode of Wellington Management's new InvestorExchange podcast, host Amar Reganti, fixed income strategist, talks to Campe Goodman, head of multi-sector credit investing, about what's next for bond markets and how investors may be able to navigate them.
Below is the excerpt of the full episode:
What impact are we seeing in Trump's first 100 days?
In the first 100 days of the Trump administration, there were significant impacts on the bond market and the overall economic environment. The administration's policies created a lot of uncertainty, particularly in the bond markets.
The uncertainty created by these policies made it harder for businesses to plan, leading to reluctance in hiring and nervousness among consumers about spending. This environment of policy uncertainty translated into economic uncertainty and a lower level of activity. Goodman believes that we are probably in a recession, but it would be a mild one.
How do you explain the relative stability of the credit markets, when compared to the equity markets?
Despite policy uncertainty causing spreads to widen, credit markets feel almost orderly and stable relative to equity markets. This stability is partly due to the fact that the bond market reflects current conditions and expectations for the future, with relatively good yields and spreads incorporating more of a risk premium.
Additionally, the reduction in the size of balance sheets through regulation has made the probability of a major crisis lower, contributing to the stability in the bond market.
Expectations of Fed policy directions?
Goodman expects that the Fed will shift from an environment where rates were stable and on hold due to steady growth and inflation risks, to an environment where the Fed is more willing to cut rates. Goodman believes that the Fed will start talking about lower rates because they are concerned about inflation. He agrees with the Fed's view that if demand comes down, inflation will fall as well. He expects that credit spreads will incorporate more of a risk premium, but they are not expected to widen dramatically.
Where can we find investible opportunities in today’s environment?
Goodman believes that some of the best opportunities are likely to be outside the US, such as Europe and in emerging market corporates. We’ve seen improving fundamentals and wider spreads in Europe, while in emerging markets, they may offer attractive yields and spreads compared to domestic options. Within the US, Goodman sees better opportunities in structured products rather than in the corporate sector. Structured products can provide diversification and potentially higher returns. Goodman also mentions convertible bonds as a valuable opportunity. These bonds can offer the benefits of both debt and equity, providing potential upside while still offering some level of protection. Goodman emphasizes that it is important to focus on both fundamentals and valuations when evaluating opportunities.
The rise of private credit
Goodman explains that private credit has largely replaced the role that banks used to play in providing capital. This shift has been beneficial in some ways, as private credit has picked up the slack in lending where banks have reduced their involvement.
Goodman points out that the lack of transparency and regulation in private credit could pose risks if there were to be a significant economic downturn.
Overall, while private credit has provided capital and helped stabilize the economy during times of financial stress, its untested nature and lack of transparency remain concerns for the future.
Potential tail risks?
Goodman highlights that significant policy uncertainty has been introduced into the economy, which makes it harder for businesses to plan and consumers to spend. This uncertainty could lead to a much more substantial recession than currently expected.
Goodman is concerned that due to policy uncertainty or some kind of policy mistake, the economy could slow much more than anticipated. He refers to this as a "Wile E. Coyote moment," where the economy suddenly finds itself without support and experiences a significant downturn.
The reduction in confidence and spending could have a profound impact on the economy. Goodman notes that strong confidence from businesses and consumers, along with policy support, has helped the economy over the past few years. Cutting confidence and spending could undermine the economy's stability.
Lesson learned from market volatility
Goodman emphasizes the importance of staying calm and confident during market turmoil. He highlights that markets do bounce back, and it's essential to remain steady and hold positions during challenging times. This lesson is particularly relevant for navigating market volatility and making informed investment decisions.
