The US market switching into a recession is inevitable and shouldn’t be treated as a cataclysmic event by investors, according to TCW’s chief investment officer for fixed income.
Tad Rivelle, who oversees around $140 billion in fixed income assets at the US group, made the comments in an investment update focused on the outlook for bond markets.
In a discussion focused on risk, Rivelle said it would be prudent for investors to add more defensive aspects to their portfolios given the growing belief fixed income is nearing the end of its cycle and is set to mean revert.
‘Business cycles and asset price cycles have become almost one and the same. Business cycles are dominated by long periods of re-leveraging and you normally see long periods of economic growth followed by a benign environment for risk taking and the upward movement for asset prices.'
‘All good things have to come to an end and the leveraging becomes excessive relative to the levels of income and GDP. The things that have gone along for the ride will eventually reach a point at which the levels of leverage are no longer sustainable and the de-leveraging becomes inevitable.’
One knock-on effects of this shift is the rise of a recessionary environment, which causes investors to panic over their positioning, which Rivelle said is wrong.
‘It is often viewed or understood that a recession represents some type of failure, as in what went wrong, but we view it as a necessary consequence. Simply a recognition that, just as night follows day, a deleveraging must necessarily follow a period of significant leveraging in the economy.’
In terms of positioning, Rivelle revisited previous comments regarding ‘breakable’ and ‘bendable’ assets, with a warning against investors seeking to enter high yield bonds at a time when the market could become increasingly volatile.
Instead, he said would be better to focus on ‘bendable’ assets, such as AAA-rated commercial mortgage-backed securities or high quality investment grade corporate bonds.
‘Investors are supposed to be opening up their risk budget at this point in time and rule number one is do not buy breakable assets, because they are not something you are supposed to buy until they actually break,’ he said.
‘But as you do open up your risk budget and add risk prudently through additional allocations in bendable asset classes to us makes all the sense in the world.’
Rivelle is co-manager across 12 bond funds in the Citywire database. The US-domiciled TCW Total Return Bond fund has approximately $9 billion in assets and returned 9.8% in US dollar terms over the three years to the end of February 2016. The Barclays U.S. Aggregate Bond TR rose 6.7% over the same period.