Fixed-Income Themes for ’16: Inflation, Quality | Capital Group


Investment Insights

January 2016

Fixed-Income Themes for ’16: Inflation, Quality

American Funds portfolio manager John Smet discusses areas of opportunity he sees for fixed-income investors looking ahead into 2016.



Kevin G. Clifford
John H. Smet


Kevin Clifford: John, just thematically, what’s top of mind for you today?

John Smet: You know, a couple themes strike me as being opportunities in fixed income today, and one is inflation. You’ve had oil prices come down dramatically, commodity prices come down. You have low inflation. And one of the things that has not done well are Treasury Inflation-Protected Securities, or TIPS. So if you look at a five-year TIPS, it’s saying if inflation is over 1.3% for the next five years, Treasury Inflation-Protected Securities are a good deal. I think there’s a very good chance the next five years inflation’s going to be higher than 1.3%. The economy is strong; unemployment is low. If we do get a rise in commodities you’re going to get higher inflation. So Treasury Inflation Protected Securities that will benefit from a little bit higher inflation, we think, will do very well.

The other thing that’s happening — and my equity colleagues see this every day — is companies are borrowing to pay higher dividends and to buy back stock, or companies have money trapped overseas and they’re issuing debt to have money in the U.S. So we’ve seen a lot of issuance in high-grade companies coming to the U.S. market. There’s been a lot of M&A.

So you’ve got a situation right now where high-grade, the highest quality good companies that are growing in the U.S. are trading at attractive levels. So I think that’s another area that you’ll look at our portfolios and you see an increase in — in high-quality corporate securities that we’re buying. Debt securities.

High-yield in emerging markets have not done well. At some point, similar to some of the beaten-up equities, there’s going to be some tremendous value with well-researched, individual high-yield in emerging markets, and I think we’ll be able to take advantage of that at some point in 2016.

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