HELPFUL TIPS: Penn Mutual Asset Management CIO Offers Inflation Protected Securities to Fight Inflation

Mark Heppenstall, president and chief information officer of fixed-income firm Penn Mutual Asset Management in Horsham, Pennsylvania, favors inflation-protected Treasury securities in an environment of persistently high inflation.

“The rapid rise in interest rates over the past year, coupled with widening credit spreads, has created the most attractive environment for high-quality fixed income assets in nearly two decades,” he said by email. “TIPS also offers an attractive relative value for investors after real yields emerged from a deeply negative area last year. Since real returns are now above (their) historical averages, TIPS could offer attractive returns and diversification features if inflation remains above the (Fed) 2% inflation target.”

After the bond markets suffered record losses last year, Mr. Heppenstall said that this year the main concern of institutional investors is the possibility of a recession.

“The most reliable indicator of a recession — Treasury yield curve inversion — recently hit its deepest level of inversion in four decades,” he said. “The willingness of investors to buy 10-year Treasury bonds 150 basis points below the level of Treasury bills is a sign of a shift from inflation fears to (fear of) growth.”

Mr Heppenstall expects the US economy to “gradually slow down” through the end of 2023, with “higher chances of a recession” in the second half of the year.

“The consumer is already feeling the pressure of higher interest rates, while the benefits of fiscal stimulus associated with COVID-19 are also declining,” he added.

But he also noted that corporate and consumer balance sheets are “strong enough” to help keep the recession “shallow.” Meanwhile, the Fed will continue to tighten, he said.

“Nearly record-breaking US labor market conditions, including the lowest unemployment rate in 50 years and more than 11 million job openings, are likely to put pressure on the Fed to keep raising interest rates,” he said. “I expect the Fed to raise another 25 basis points at its upcoming meetings in March and May, and then take a pause in the increase.”

Mr. Heppenstall also noted that after “underestimating the persistence and rate of inflation last year,” Fed policymakers now fear that tight labor market conditions could create “a resilient high-inflation environment that maintains a self-reinforcing cycle when higher wages fuels higher prices.” .”

Penn Mutual Asset Management manages $30.3 billion in assets.

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