Where can I find income with the Fed on hold? - J.P. Morgan Asset Management

Where can I find income with the Fed on hold?

Contributor David Lebovitz

As expected, the Federal Open Market Committee (FOMC) left interest rates unchanged at the March meeting. More importantly, however, they adjusted their forecasts to now show no interest rates hikes in 2019, one in 2020, and none in 2021. Interest rates moved lower in light of this new information, leaving investors facing the same issue of where to find income in an environment of historically low real and nominal yields.

Public market opportunities appear limited at the current juncture; high yield and emerging market debt (EMD) look attractive relative to some of the other areas across traditional fixed income, particularly as a Fed pause should keep the U.S. dollar contained. Furthermore, healthy demand from a Fed which is shifting the composition of its balance sheet, as well as large institutional investors, should keep rates relatively contained absent a sudden acceleration in growth or inflation.

With rates expected to remain low, embracing real assets is one way that investors can increase the stream of income their portfolio produces. Core U.S. real estate is looking a bit expensive, but infrastructure assets continue to provide a healthy stream of income alongside the potential benefit for capital appreciation. Furthermore, if a Fed-on-hold does lead inflation to accelerate, infrastructure investments can help offset these rising prices, as any increase in cost is typically passed through to the end-consumer.

At the same time, many investors have embraced private credit and direct lending strategies as a way of enhancing their income return. That said, we see risks beginning to build in this space. Sixty percent of the $800bn in leveraged loan issuance last year was used to fund M&A/LBO transactions, and with EV/EBITDA multiples at cycle highs, private equity firms are using more and more leverage to fund deals at unattractive valuations. As such, focusing on managers with stringent underwriting standards, and who do not plan on providing financing for an indefinite period of time, will be of the utmost importance during the later stages of this economic expansion.

No rate hikes this year?!?

FOMC and market expectations for the federal funds rate

Source: Federal Reserve, J.P. Morgan Asset Management. Data as of March 20, 2019.

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