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Fixed Income Investment Outlook: June 2022

By Richard "Crit" Thomas, CFA, CAIA
Income Investing
Fixed Income 2022

While the Fed has moved aggressively, they still have more work to do. We believe that the Fed will have to create economic pain in order to achieve their objective to getting inflation back down to target, and a recession is a real risk. As such we are advocating for a higher quality approach to fixed income. 

It does help that after a very rough start to the year,

Yield to Worst

lower bond prices have brought higher yields and wider credit spreads. For non-investment grade bonds, though, we don’t think credit spreads have gotten wide enough and we are waiting for a better entry point. 

I’m recording this in the middle of June and the yield on the Bloomberg U.S. Aggregate Index is almost 4%, the highest yield in 13 years. We do see these yields as attractive. Admittedly, this much higher yield still doesn’t cover inflation, but over the coming years we believe that inflation comes down and it will look attractive in retrospect. Additionally, I mentioned that recession risk is rising, in fact we have adopted it as our base case, and in that instance investment grade bonds should hold up well if that occurs.

So while fixed income has not helped manage equity risk to-date, we believe investment grade bonds will do a much better job going forward. 

We are currently holding duration at where the Bloomberg U.S. Aggregate Index is, which is currently at about 6.5 years. We consider this a neutral duration position. We are looking to increase duration should rates move higher. Our 10 year Treasury yield model

10 Year Treasury Jun-22

suggests that we could get over 3.5%. The other consideration with duration is what happens to supply and demand for Treasuries as the Fed stops buying them and begins to drain their balance sheet. We are anxious to see whether this quantitative tightening negatively impacts Treasury prices, it is too early to tell at this point.

For more of our thoughts on fixed income please visit our website at Touchstone Funds.com

This commentary is for informational purposes only and should not be used or construed as an offer to sell, a solicitation of an offer to buy or a recommendation to buy, sell or hold any security. Investing in an index is not possible. Investing involves risk, including the possible loss of principal and fluctuation of value. Past performance is no guarantee of future results.

Please consider the investment objectives, risks, charges and expenses of a Fund carefully before investing. The prospectus and the summary prospectus contain this and other information about the Funds. To obtain a prospectus or a summary prospectus, contact your financial professional or download and/or request one at TouchstoneInvestments.com/literature-center or call Touchstone at 800.638.8194. Please read the prospectus and/or summary prospectus carefully before investing.

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A registered broker-dealer and member FINRA/SIPC.
Touchstone is a member of Western & Southern Financial Group
©2022, Touchstone Securities, Inc.

crit thomas global market strategist

Richard "Crit" Thomas, CFA, CAIA

Global Market Strategist
Crit is responsible for examining and evaluating economic conditions, generating insights and providing a sharpened perspective on investment strategies for enriched portfolio construction.

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