Devereux: Federal agencies have been working behind the scenes to help certain banks shore up reserves, further containing any contagion. Meanwhile, non-bank money market funds have seen remarkable flows in recent weeks, with the largest flows into government money market funds. Part of that is because of a flight to quality after the scare with bank closures, but it’s also because yields for money markets are currently very attractive.
Yields are also up for all fixed income, raising expected returns going forward. For investors who might have shied away from bonds because of their performance in 2022 or because of the years of low yields before that, it may be an opportune time to consider adding bonds to portfolios. Bonds are a strong diversifier to equity risk over the long term. Currently, you can lock in attractive yields as well.
Bonds tend to rally during a recession, and a recession is our base-case forecast. We recommend a defensive approach, focused on high-quality fixed income such as U.S. Treasuries, agency mortgage-backed securities, and municipals. For credit sectors, there is a lot of yield to be had in corporate credit. But with a recession likely on the horizon, it is critical to choose the right names. That is what our active teams do exceptionally well.
We’ve experienced times like these before, and we’ll likely experience them in the future. Our disciplined approach to portfolio management enables us to focus on the long term while weathering market swings.