Hi, I'm R.J. Gallo, Senior Portfolio Manager in Fixed Income at Federated Hermes.
What do you expect the economic recovery to look like?
The recovery is apt to be somewhat gradual, in my opinion. I've noticed in the financial media, certainly among us in financial markets, even the economists, they've taken to describing the recovery in terms of a letter. The initial thought or hope was for a V, a rapid downturn followed by a rapid recovery, in the shape of a V. That seems pretty unlikely. With the degree of job loss and economic contraction being the greatest in post-war history, it's just very unlikely that we're gonna see the bounce back and make it look like a V. Maybe a better descriptor would be a U, or a somewhat crooked U, where the portion that was the downturn was steep.
You sorta have a gradual recovery early on, which I think we are in right now, the lows in the economy are probably behind us as the re-openings are happening across the country. And then, as we move forward, we'll see how the dynamic evolves between clear desire for pent-up demand to go out and shop and to travel, how that is confronted by health risk. Let's face it, the virus is still out there, we still don't have a vaccine. So, I'm not so sure the recovery part of the U, the upward side, will be as steep as the downturn was. So in many ways, it's sort of a crooked or broken U, and I do think that ultimately, we are off to a better day, in terms of our economic performance. I just can't estimate at this point in time how the trade-off between health, risk, and economic decision-making will unfold.
Where are you finding opportunities?
Well, as an active manager, Federated Hermes Fixed Income is always looking for opportunities, and when you shock the economy as profoundly as we did in order to try to tamp down the contagion of the virus, there were many dislocations. Credit spreads, for example, and high-yield and corporate bonds widened drastically. And throughout the weeks that followed, we at Federated Fixed Income became much more positive, for example, on investment-grade corporate bonds, and went meaningfully overweight in investment-grade corporate bonds in our multi-sector bond fund. Within municipal bonds, after the initial shakeout, where credit spreads with munis also widened out, we also recently started adding risk, adding triple B-rated bonds, looking for hospital bonds.
Many hospitals were struggling in the early days of the shutdown, but now, with the re-opening, we see opportunities there. In short, it tends to be places where we think credit risk is priced in such a way that the bond is too high in yield relative to where we think it's going to go over the next three to six months, and that's where we're looking to put our capital; that's what active managers do. We've also found opportunities to adjust our interest rate exposure, so, over the last five, six weeks, we have tactically shortened up our duration, and in anticipation interest rates would rise. They did, we went back to neutral. Similarly with the yield curve, we positioned our portfolios in the taxable fixed income space multisector, in anticipation of a steepening of the yield curve, meaning that we thought 30-year yields would go up more than, say, five-year yields, and that too has been successful. So, with respect to duration, slope of the yield curve, and credit risk, we have seen varying opportunities over time. It's not a static game, though. Sometimes, we turn a bet on, sometimes, we turn it off.
Disclosure: Views are as of June 12, 2020, and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector. Bond prices are sensitive to changes in interest rates, and a rise in interest rates can cause a decline in their prices. High yield, lower-rated securities generally entail greater market, credit/default and liquidity risks, and may be more volatile than investment-grade securities. Yield Curve: Graph showing the comparative yields of securities in a particular class according to maturity. Securities on the long end of the yield curve have longer maturities. Federated Investment Management Company 20-10092 (6/20)