HomeMost PopularIs Adding Interest Rate Risk Worth It?

Is Adding Interest Rate Risk Worth It?

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A changing rate narrative now leaves advisors weighing the costs and benefits of taking on additional interest rate risk. Mark Cintolo of Natixis Investment Managers and Dominic Nolan of Aristotle Funds joined VettaFiโ€™s Todd Rosenbluth to discuss rate risk in the recent Fixed Income Symposium.

Mark Cintolo, CFA, CAIA, VP, and portfolio consultant at Natixis, explained that the firm expects two rate cuts this year. He cited the increasing divergence of CPI and core PCE as a primary reason for cuts later this year. Core PCE is a primary inflation measure that the Fed uses when considering rates.

โ€œAt a high level, the market tends to focus a little bit too much on the exact number and the month of the first cut,โ€ Cintolo explained. โ€œThe point in our mind is that we donโ€™t have broad-based inflation reacceleration.โ€ Instead, inflation remains constrained to specific areas, which doesnโ€™t lend itself to rate hikes, according to Cintolo.

Using Duration to Capture Historic Yield Opportunities

According to a poll conducted during the webcast, it creates an environment in which advisors are currently taking on less duration than the broad benchmark. However, Cintolo believes investors should look to increase duration, given the yield opportunities and potential for improved stock/bond correlations.

โ€œThe real yield thatโ€™s available today is really attractive relative to history,โ€ he said. Locking in a 10-year Treasury at 4.6% in an environment of 2.5% inflation allows investors to capture a 2% yield risk-free. โ€œThatโ€™s a yield that we havenโ€™t really seen since before the global financial crisis.โ€

Natixis offers a variety of actively managed funds with strategies that weigh potential growth and inflation trajectories. By determining higher and lower probability outcomes compared to the market, the portfolios tilt to express those views. The current outlook favors rate cuts in the next six to 12 months and, therefore, tilts toward increased duration.

Natixis offers a range of funds within the intermediate duration class, where the firm sees strong opportunity. These include the Loomis Sayles Core Plus Bond Fund (NERYX), the Loomis Sayles Investment Grade Bond Fund (LSIIX), and the Oakmark Bond Fund (OAKCX).

โ€œIf youโ€™ve got another yield-like environment like last year, youโ€™re going to make 5%,โ€ Cintolo added.

Why You Shouldnโ€™t Overlook Credit When Considering Rate Risk

Dominic Nolan, CFA, CEO of Aristotle Investment Services, advisor to Aristotle Funds, believes the Fed wants to cut rates but is bound by its 2% target.

โ€œMy concern is, post-COVID, obviously with all the stimulus during the pandemic, I think inflation targets should be readjusted,โ€ Nolan explained. โ€œTo me, itโ€™s a matter of how flexible the Fed is willing to be if inflation remains above the 2%.โ€

Aristotle Investment Services brings active management and fundamental investing to its lineup. The firm focuses on credit opportunities, which Nolan defines as the best asset class within fixed income.

โ€œCredit vol [volatility] has actually been very underappreciated,โ€ he said. โ€œItโ€™s actually been less volatile than rate vol. In our opinion, we would rather increase credit risk and reduce duration risk.โ€

See also: โ€œDonโ€™t Miss out: 2024 Credit Market Opportunitiesโ€

Credit investing brings broad diversification across a spectrum of asset classes, credit qualities, fixed or floating rate, and more. The firm offers the Aristotle Strategic Income Fund (PLSFX), the Aristotle Floating Rate Income Fund (PLFDX), and the Aristotle Core Income Fund (PLIDX).

โ€œIf you look empirically, credit vol and rate vol are negatively correlationed,โ€ Nolan explained. โ€œYou can add certain credit instruments to an investment-grade portfolio and reduce the vol, increase the yield, and thatโ€™s how weโ€™ve positioned many of our portfolios through this cycle.โ€

For more news, information, and analysis, visit theย Portfolio Construction Channel.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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