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LivestreamMenuIncome investors may want to toss out their old playbook now that Kevin Warsh is at the helm of the Federal Reserve. The chairman has already called for a ” regime change ” at the central bank and created five task forces to evaluate the way it does business. He has curtailed signals about future rate moves, shortened the central bank’s post-meeting statements and often provides few answers about his particular policy views. This comes at a time when the 30-year Treasury yield topped 5.33% on Tuesday, a new 19-year high , on continued inflation and spending concerns. The government deficit soared to $432.3 billion in July, the largest monthly deficit since March 2021, and inflation remains well above the Fed’s 2% target. As a result, investors now need to shift their approach for a “new fixed-income regime,” said Luis Alvarado, co-head of global fixed income strategy at Wells Fargo. “Investors need to wake up and understand that the game has changed,” he said. Data reaction While the market used to constantly react to any messages out of the Fed, so-called Fedspeak, it now has to react to economic data itself. That’s the point Warsh drove home after the central bank’s July meeting. “Market participants are learning to play the ball, not the referee — and market prices will continue to respond in the direction and magnitude they see fit,” Warsh said at the time. The market can readjust to the Fed’s new communication style, as it has done in the past, said Matthew Wrzesniewsky, head of fixed income client portfolio management at Vanguard. There just may be some volatility as participants look for more of an explanation on why there has been a shift, he added. “When you take a look at the market from a long-term perspective, your yields are historically attractive, and the good thing that we have is an abundance of income to help us tolerate some type of uncertainty in markets,” Wrzesniewsky said. However, investors need to stay selective as the market does the pricing work — and contends with factors such as the ballooning deficit and a flood of new debt issues coming to the market from hyperscalers looking to fund their massive artificial intelligence investment, Alvarado said. “Not all income is created equal,” he said. Select opportunities Alvarado believes market volatility that will come from the Fed’s shift will create opportunities for active investors. He likes the one- to five-year part of the curve and is staying high in quality, focusing on investment-grade corporates and mortgage-backed securities. MBS should not be facing mortgage refinancing anytime soon, while corporates have benefited from healthy earnings, he said. Active investors can be choosy in the latter, focusing on specific industries and sectors that could benefit from the AI buildout. For his part, BlackRock’s Rick Rieder told CNBC in July he doesn’t anticipate more market volatility as a result of the new Fed regime. He believes investors should enjoy the income that bonds now provide, without the rockiness seen in the past. “We’re in an environment where real rates are much higher than they’ve been for two decades,” said Rieder, the firm’s chief investment officer for global fixed income. “Revel in the glow of higher real rates and higher income, and with what I think will be a lower level of rate volatility.” Rieder sees opportunities in non-agency mortgages and commercial mortgage-backed securities due to their attractive yields. He also likes agency mortgage-backed securities, which have lower rate volatility than investment-grade corporate bonds. In addition, Rieder, who also manages the iShares Flexible Income Active ETF (BINC), has been diversifying into European credit. For Vanguard’s Wrzesniewsky, curve positioning is important right now. He’s sticking with the intermediate part of the curve and avoiding the long end because of inflation and premium risk. The short end has reinvestment risk, he said. He is staying in high quality bonds instead of reaching for yield — and also sees select opportunities in investment-grade corporate bonds, including financials. “Bank earnings season helped to reveal a look into the strength of the broader economy, where the credit cycle is ultimately,” Wrzesniewsky said. In addition, he thinks agency mortgage-backed securities are providing an attractive yield. — CNBC’s Jeff Cox contributed reporting.Read More
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