Eric Stein
Institutional investors should be looking for opportunities in Treasury duration as an offset to equities, as well as assets in emerging markets, says Eric Stein, head of investments and CIO of fixed income at Voya Investment Management.
“Treasury duration as an offset to equities has value where, in most environments, it didn’t,” Stein says. “[Like] in 2022 with this kind of risk parity, shock, real rates up, equities down, bonds down—I think we’re in a different environment, so there’s some value to duration.”
Stein contrasts today’s environment with recent history, when Treasury did not offer the same kind of hedge.
“I think there is actually kind of protection value in duration in fixed income that we didn’t have,” Stein says. “If you go back 10 [or] eight years ago, Treasurys were so low, it was like: What’s really the protection value in fixed income?… If we have a real recession, those yields are coming down, and that’s protection against the kind of riskier-part equities or credit-spread components of a portfolio.”
Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news. ?
On the emerging markets side, Stein says assets, specifically local-currency assets, are attractive, given where developing countries are in the economic cycle. In a weaker-dollar environment, which Stein expects, it is valuable as a dollar-based investor to hold non-dollar currencies.
Stein also points to opportunities in securitized and structured products.
Tariff Impacts
“I think there’s an intellectual push for tariffs from the administration, but there are these two moderating forces of legality and then market reaction that are gating mechanisms to them,” Stein says.
With a sharp rebound in markets since the lows following President Donald Trump’s “liberation day” in April, Stein doubts that tariffs themselves will drive markets back to where they were.
“They could, they always could, but I doubt they will,” Stein says. “The real risk in markets is the concerns around fiscal policy that we see.”
In fact, Stein says markets are getting used to tariffs.
“You typically see this so often in financial markets: [Markets] get kind of obsessed or fixated on one thing, and then the market evolves to say, ‘OK, I can narrow the range of outcomes on this, we’ll move on to something else,’” Stein says. “So the range of outcomes … is wide, but narrowing. I expect the markets to still focus on tariffs, but it will ebb somewhat, and there will be an increasing focus on: What is growth? What is inflation? What is fiscal policy? Things of that nature,” Stein says. “So it’s not a massive disconnect from tariffs, but just a decay factor in the market sensitivity to tariffs.”
Stein says in asset owners’ approach to market volatility, institutions’ slow decision-making processes is both a help and a hinderance.
“In some ways, the benefit of being an asset owner is that you can actually look through some of this; you get saved; the construct of a lot of those institutions with investment committees and boards and [being] intermediated by consultants, things like that: They’re slow to move,” Stein says.
Geopolitical Risks
But this drives benefits and costs, Stein says.
“The cost is: It’s harder to jump in when things are really cheap,” he continues. “The benefit is: You don’t do something maybe you’d regret or [something] stupid in real time when markets sell off. … Markets, to me, have a tough time pricing geopolitical risk, because they typically don’t price it, and then maybe, occasionally, it becomes all encompassing.”
Some investors have suggested that the safe harbor that U.S. assets have long provided investors is in question, a result of uncertainty over federal policy, but Stein says investors have few safe assets outside of U.S. securities.
“A lot of things [are] being done to maybe push on that narrative,” Stein says. “There really isn’t an alternative. China would love alternatives, a lot of the countries would love alternatives, [but] there really isn’t an alternative there.”
Related Stories:
Conning CIO: Insurance Investors Should Be Patient Amid Market Volatility
Voya Investment Management Names Matt Toms First Global CIO
The Evolution and Revolution of Active Fixed-Income ETFs
Tags: Eric Stein, Fixed-Income, Voya, Voya Investment Management
#Voya #FixedIncome #CIO #Tips #Treasury #Duration #Emerging #Market #Assets #Offsets