Page 8 - ISQ July 2022

INVESTMENT STRATEGY QUARTERLY APRIL 2020

FED

Q&A: The Path Forward for Fixed Income

James Camp, CFA, Managing Director, Strategic Income at Eagle Asset Management*

Nicholas Lacy, CFA, Chief Portfolio Strategist, Asset Management Services

After the first half during which fixed income investors saw the Treasury bonds such as corporates began to widen. As
worst bond market in 40 years, what is the direction of fixed mark-to-market losses in bonds showed up in the first
income going forward? Can the US Federal Reserve lead? And half, that created a spread widening and liquidity issue
what opportunities may present themselves along the way? with a lot more bonds for sale than buyers ready to step
in at those levels.
James Camp recently delved into past, present, and likely future
factors shaping the bond market with Nicholas Lacy. Lacy: If the bond market is trading ahead of what central banks

seem likely to do, do you think the worst is over?
Lacy: What caused the large decline in bond prices before the
Federal Reserve (Fed) took action? Camp: Our thinking is that the worst, in terms of performance for
the Treasury market, is behind us and that Treasury yields
Camp: The intermediate and longer-term bond market was are in a peaking process and are consolidating around a

anticipating the Western central banks’ need to raise narrower range. That would be supportive of bond prices
interest rates to combat inflation, which it had finally going forward and ulti mately will prove to be a good entry
concluded was non-transitory. So, the intermediate and point for new funds or for dollar-cost averaging into the
longer-term tenor of fixed income had already priced in a bond market.
series of rate moves.
Lacy: How do you think the Fed, in particular, is doing in what it's

The large declines were partially a function of where we doing, and how are you going to know if the Fed has suc-
started. When we closed 2021, the 10-year Treasury ceeded in taming some of those inflation numbers?
yields, on both sides of the Atlantic Ocean were signifi-
cantly lower. A large part of the mark-to-market decline Camp: The Fed has a couple of tools. Interest rate moves on the
in fixed income instruments occurred in the up-move short end are one of those, but it also has stated that it
since the start of the year. Also, prior to the Western cen- wants to slow aggregate demand. I think the Fed knows
tral banks finally committing to “lift off” short-term that the supply chain issue does not resolve itself over-
interest rates, spreads in municipal bonds and non- night, and the best way to marry up supply and demand

8 *An affiliate of Raymond James and Associates, Inc., and Raymond James Financial Services, Inc.