Global Conservative portfolio positioning intra-quarter update as of 7/15/2021
Reduced the portfolio’s expected interest rate sensitivity by adjusting investment-grade corporate bond exposures
July 15, 2021
Actions and Overview:
Shortened the average duration/maturity of the portfolio’s fixed-income allocation; maintained corporate overweight
- Eliminated the portfolio’s long-term investment-grade corporate bond ETF holding
- Added to an existing intermediate-term investment-grade corporate bond ETF holding
We continue to see prospects for strong global GDP growth, particularly in the U.S., in coming quarters and therefore continue to overweight equities and underweight fixed income in our balanced strategies relative to their benchmarks. Similarly, we continue to emphasize investment-grade (IG) corporate bonds over Treasury securities within our fixed income allocations.
In recent months, longer-term bond yields have moved lower, reaching levels that we believe are unsustainable over the next 6-18 months given a strong real growth environment and above-average, yet contained, inflation. The move lower in long-term rates (10+ years) in particular over the last few months has improved the risk-reward of shortening duration in our view. We took this opportunity to exit our long-duration IG corporate bond position and add to existing intermediate duration corporate bond exposure. After these trades, our fixed income allocations remain overweight IG corporate bonds and have an even shorter duration relative to the U.S. Government/Credit Index, even as the portfolio’s income profile is little changed.
Eliminated the portfolio’s long-term investment-grade corporate bond ETF holding:
- The general flattening of yield curves in recent months has caused longer-duration bonds to outperform.
- We view the current levels and shape of the IG corporate bond yield curve as unsustainable over the next 6-18 months, given prospects for robust real growth and above-average, yet contained, inflation.
- A potential re-steepening of the IG corporate bond yield curve exposes longer-duration IG corporate bonds to interest rate risk, even as holders of longer duration corporate bonds are now being compensated less for that interest rate risk as yield curves have flattened.
Added to an existing intermediate-term investment-grade corporate bond ETF holding:
- Intermediate IG corporate bonds currently offer about 80 basis points more yield than similar-term nominal Treasury bonds, and we believe these spreads will likely persist and lead to corporate bond outperformance in a benign credit environment.
- Additionally, as longer-term bond yields have fallen, the IG corporate yield curve has flattened and intermediate IG corporate bonds now offer similar yields to longer-term IG corporate bonds.
- As the economy continues to improve, we expect yield curves will eventually re-steepen and shift higher, consistent with prior recoveries and expansions, allowing shorter-duration corporate bonds to outperform vs. longer-duration bonds.