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Text on screen: Marc P. Seidner, CIO Non-traditional Strategies
Seidner: The inflation outlook is increasingly uncertain and it is a reality that many of today’s investors have not invested through a level of inflation uncertainty as we have today, which, again, warrants a period of caution, conservatism, and humility when thinking about the inflation outlook.
We have to recognize that there are risks, and therefore we need to be very conservative in our portfolio construction.
It’s much better to look for mispricings and opportunities as the environment evolves rather than trying to predict a particular modal outcome. Now, there are opportunities to capitalize on for those investors that have a view that inflation will be more persistent and more elevated than the market might be anticipating.
One of those in particular would be inflation protected bonds. Breakevens on inflation protected bonds have increased quite dramatically in recent months, but that largely reflects the known news of the heightened levels of current inflation readings.
As you look out the forward curve into inflation swaps and further out the inflation yield curve, there’s actually quite a benign view on longer term inflation. And again, for those that have a view that inflation may be more persistent, and last longer, than the market may be pricing, inflation protected bonds may present one opportunity to hedge against inflation uncertainty right now.
Another area that that presents opportunity in our minds would be in yield curve positioning. You look at the yield curve two years forward, yield curve's incredibly flat and if inflation were to become a more persistent problem, one could envision that the yields on longer term securities might increase relative to shorter term fixed income securities. So both inflation protected bonds and positioning along the yield curve are two ways in which one could capitalize or potentially position for an increasingly uncertain inflation outlook. But again, would want to reinforce that this is an environment for a pretty strong humility in terms of portfolio construction and recognizing what we know and what we don't know, and really looking for mispricing's rather than try to anticipate the future.
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Please note that the following contains the opinions of the manager as of the date noted, and may not have been updated to reflect real time market developments. All opinions are subject to change without notice.
Inflation-linked bonds (ILBs) issued by a government are fixed income securities whose principal value is periodically adjusted according to the rate of inflation; ILBs decline in value when real interest rates rise. Treasury Inflation-Protected Securities (TIPS) are ILBs issued by the U.S. government. Derivatives may involve certain costs and risks, such as liquidity, interest rate, market, credit, management and the risk that a position could not be closed when most advantageous. Investing in derivatives could lose more than the amount invested. Swaps are a type of derivative; swaps are increasingly subject to central clearing and exchange-trading. Swaps that are not centrally cleared and exchange-traded may be less liquid than exchange-traded instruments.
Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions or are appropriate for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Outlook and strategies are subject to change without notice.
Forecasts, estimates and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. There is no guarantee that results will be achieved.
This material contains the opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
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