Technicals Support Fixed-Income (Feburary 2, 2022)

Bonnie Wongtrakool: In terms of the front end, where we see value is specifically within 3 to 5 year corporates, IG credit, investment grade credit. That's a sector that we found attractive end of last year at higher yields. Of course, spreads and yields have come in since then, but we still think it presents a lot of value. That's a place where we expect that investors will get really good total return with minimal risk given the investment grade credit rating.

Scarlet Fu: In looking at today's rally, especially in equities, one driver for it is that a lot of shorts are covering their positions. So some of this might be tactical. This overreaction that we saw, at least in the early bout of the trading day that we're now seeing kind of come back down to earth in the afternoon as indexes pare their advance. Once that is washed out, how much more fuel is there to keep this advance going, especially with the S&P 500 at its highest in about five months?

Bonnie Wongtrakool: Well, I think it goes back to what I was saying before about sort of risk parity. And so what you're describing is referring more to the equity shorts of the of the market. And I think with respect to fixed income, I think there is still a lot of underinvestment in that part of the market. We also think the foreign demand that's been kind of on the sidelines for currency reasons, and there's every reason to believe that that could come back as well. So I think there are still technically supportive factors for the bond market across all different subsectors. So not just in Treasuries, but also across corporate credit and other sectors as well, like emerging markets.

Scarlet Fu: Always good to get a bond investor's take on the equity market as well. Bonnie Wongtrakool, really appreciate your joining us, Portfolio Manager, Head of ESG Investments at Western Asset.