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The views expressed herein do not constitute research, investment advice or trade recommendations, do not necessarily represent the views of all AB portfolio-management teams and are subject to change over time.
Monika Carlson: The markets are shifting, and so is the playbook. The Fed has recently resumed cutting rates. They signaled that there are more rate cuts to come. And so now the question is not if duration matters, but how do you put it to work?
Fahd Malik: Duration management has been a very powerful tool in terms of generating alpha. But going forward, we think being nimble is going to give you your real edge. Look, yields have fallen a lot in the last few months, and we think it’s important to have duration, but what’s going to matter is what maturities you buy in duration and where you source that duration from.
MC: So flexibility is key. Today’s macro backdrop has been very supportive for fixed income, and so bonds have had their moment, but you can’t just set your portfolio positioning and forget about it. Yields are not static, so your portfolio duration shouldn’t be, either.
For us, we’ve been adding duration when yields move higher. We’ve been reducing it when yields move lower. And so that has allowed us to benefit as yields have mean reverted. But it’s not just about the absolute level of duration, is it? You also have to think about the positioning along the Treasury curve.
FM: We think shorter-dated Treasuries can continue to fall in yield as the Fed embarks on a cutting cycle. However, the long end, we think, can remain volatile because of fiscal pressures, policy uncertainty and questions around the Fed’s independence. So the way we want to structure the portfolio is such that it benefits as the front end of the Treasury yield curve goes down in yield.
MC: But it’s not just about the positioning along the Treasury curve, is it?
FM: Right. So you’ve got to own your duration from a diverse set of sources. Treasuries, as we know, is the purest form of duration. And when yields fall, Treasuries will benefit the most. Agency mortgages also give you duration, but they also give you an extra bit of yield. So for us, it’s very important to own Treasuries and manage that interplay between agency mortgages and Treasuries.
MC: So today’s environment is great for active and dynamic duration management, for balancing your positions along the curve, for shifting and diversifying your sources of alpha, and adjusting the portfolio positioning as markets evolve.
The views expressed herein do not constitute research, investment advice or trade recommendations, do not necessarily represent the views of all AB portfolio-management teams and are subject to change over time.
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