Mark Heppenstall, president and CIO of Horsham, Pa.-based institutional fixed-income specialist Penn Mutual Asset Management, likes Treasury inflation-protected securities in this climate of persistently high inflation.
"The rapid rise in interest rates last year coupled with widening credit spreads have created the most attractive environment for high quality fixed-income assets in nearly two decades," he said by email. "TIPS also offer attractive relative value for investors after real yields moved out of deeply negative territory last year. With real yields now above (their) historical averages, TIPS may offer attractive returns and diversification characteristics should inflation remain above the (Federal Reserve's) 2% inflation target."
After bond markets suffered record losses last year, Mr. Heppenstall said this year the primary concern of institutional investors is the likelihood of a recession.
"The most reliable recession indicator — an inversion of the Treasury yield curve — has recently moved to the deepest levels of inversion in four decades," he said. "The willingness of investors to purchase 10-year Treasuries 150 basis points below the level of treasury bills is a sign of the shift from fears of inflation to (fears about) growth."
Mr. Heppenstall expects the U.S. economy will "gradually slow" for the remainder of 2023 with "higher odds of a recession" occurring in the second half of the year.
"The consumer is already feeling the pinch of higher interest rates while the benefits of COVID-19-related fiscal stimulus are also declining," he added.
But he also noted that corporate and consumer balance sheets are "strong enough" to help keep the recession "a shallow one." Meanwhile, the Fed will continue to tighten, he said.
"The near-record tight labor market conditions in the U.S. — including the lowest unemployment rate in 50 years and more than 11 million job openings — is likely to keep pressure on the Fed to keep hiking interest rates," he said. "I expect the Fed to hike another 25 basis points at its upcoming March and May meetings and then take a pause on hikes."
Mr. Heppenstall also observed that after "underestimating the persistency and level of inflation last year," Fed policymakers are now fearful that tight labor market conditions risk creating "a sustained high inflation environment where a self-reinforcing cycle persists where higher wages fuel higher prices."
Penn Mutual Asset Management has $30.3 billion in assets under management.
