“The bond market has actually given you a gift right now,” says Mark Wisniewski, Ninepoint Partners senior portfolio manager overseeing the firm’s fixed income team and investment strategies. Bond yields are at levels we haven’t seen in at least a decade and interest rates are remarkably high compared to recent history. Wisniewski says that’s led to corporate and government bonds trading at deep discounts.
With struggling regional banks, Wisniewski tells the Alt Thinking Podcast that we’re seeing liquidity dry up. Is it enough to recreate the financial crisis of 2008? The fixed income strategist doesn’t think so. “I don’t think it’s going to be a widespread problem,” he states. What Wisniewski is seeing, however, is more volatility as fixed income investors fear a recession in 2023. A dramatic drop in 10 year interest rates is considered a good proxy for what the market thinks about a slowdown. His model looks at the yield curve, the 3 month versus the 10 year bond, and it’s predicting an 80% chance of recession. “The yield curve is an awesome predictor of a recession,” Wisniewski points out. But he adds it’s a terrible predictor of timing.
So how is the fixed income strategist addressing the likelihood of a recession versus the lack of clarity on timing? By buying the same investments an equity manager buys – but higher up the capital structure. He’s taking the companies he likes and buying the bonds on a shorter term basis, slowly adding to the duration because if his model proves accurate, longer year rates will drop.
Wisniewski is also buying credit that’s higher quality, moving from BBB to A because he doesn’t particularly like high yield. Ninepoint has largely divested most of the high yield investments it has owned. And because the shape of the yield curve is so inverse, Wisniewski is selling longer dated credit and buying shorter dated credit at almost the same yield.
“Any time you can lend less to somebody over a shorter period of time and get paid the same, that’s kind of a no-brainer to us.”