What are the factors affecting fixed income investing in 2024?

Adam Gileski, Director, Public Fixed Income, Swiss Re, discusses the trends around fixed income as an investment sector – the challenges and opportunities in 2024.

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Adam Gileski, Director, Public Fixed Income, Swiss Re.

“I am sceptical about rate cuts. I like the idea that the Federal Reserve (Fed) sees inflation as basically under control but not yet to the levels that it wants to be.” These words came from Adam Gileski, Director, Public Fixed Income, Swiss Re, speaking at the Insurance Investor Live | North America event in December last year in New York, which is now featured in the Insurance Asset Management North America 2024 report.

Gileski was speaking on a panel about market location at the end of 2023, also discussing the 2024 outlook. The panel, moderated by Stephanie Thomes, Senior Insurance Investment Consultant, Mercer, also featured participants from Reinsurance Group of America and PPM America. In the discussion, Gileski expounded on his thoughts around possible rate cuts and the outlook for the wider investment ecosystem.

“I am an acolyte of Bruce Kasman of JP Morgan Securities, and in his view, and I guess my view, consumers do not like inflation, and the Fed wants to make sure that inflation is under control and stays that way,” he said. “With this in mind, rate cuts just don’t fit into that picture; you would need to see a lot of serious disruption to the downside before that comes into view.”

Gileski’s views are still the most prevalent in the market. According to AP News in March, the Fed’s policymakers — as a group — had pencilled in “three rate cuts for 2024, just as they had in December”. The commentary noted that some economists still expect the Fed to carry out its first rate reduction in June or July. But even at February’s Fed meeting, “some cracks had emerged: Nine of the 19 policymakers forecast just two rate cuts or fewer for 2024”.

You can read more of Gileski's thoughts from the panel discussion below.

Stephanie Thomes: How is [the current interest rate and possible Federal Reserve cuts in 2024] influencing your strategic asset allocation (SAA) from a longer-term perspective?

Adam Gileski: Like everyone else, our SAA is intended to be a long-term instrument. That being said, from a bottom-up perspective and as a credit guy more than anything else, we still have a great degree of concern about the susceptibility of the banking sector – as well as other rate-sensitive financial sectors – to the persistent high-interest rate environment.

"We expect to continue to walk that private proportion up over time."

As a result, our SAA is de-emphasising public investment grade (IG), which is what you would normally expect an insurance company’s core asset class to be, and we are looking more at private credit where we can step into the shoes of banks that either want or need to exit lending arrangements but we are being selective about that. 

As it pertains to the broader question of the SAA, on the margin our allocation to credit is at the highest that it has been for some time, and it’s shifting from public markets to private markets. We expect to continue to walk that private proportion up over time.

Stephanie: Considering the risk assets exclusively, how do opportunities differ today across equities, fixed income, and alternatives?

Adam: We are looking at credit and alternatives, and we have downsized listed public equities for the time being.

Stephanie: Private credit has evolved into a much broader system than it was five-to-ten years ago. It was almost exclusively middle market lending, then it went to small and large cap middle market, and now it has evolved to a significantly broader spectrum of what used to be called ‘esoteric credit’. How are you diving into the private credit space today?

Adam: We are still steering clear of esoteric. We would have the underwriting capability to do so — our private effort is quite extensive — but there are enough opportunities in the more traditional areas.

The middle market in particular feels like a sweet spot for us from both an underwriting and opportunity point of view.

Stephanie: Considering fixed income with yields being 'back', which asset classes that were popular in the area of low rates are now looking less interesting? Are you actively pulling out of them, or are you going to let them run off?

Adam: I would add that the agency securitised has not had a terrific asset performance over the past year given the extension risk that presented itself. It is an interesting quandary on the desk for us right now.

"It makes it a much tougher call when you are trying to decide between public investment grade versus agency securitised given the lower credit intensity."

Those spreads on a nominal basis are attractive, but if you think about both the fundamentals of the economy and the technicals that typically underpin the agency securitised market that are probably not there right now – in particular the banks’ involvement in taking down significant portions of the mortgage-backed securities (MBS) production as well as the Fed no longer being involved – it makes it a much tougher call when you are trying to decide between public investment grade versus agency securitised given the lower credit intensity.

You can read the rest of Gileski’s thoughts, as well as the report in full, by clicking here.