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Market strategist: ‘There has been an overreaction’ in fixed income

RiverFront Investment Group Global Fixed Income CIO Kevin Nicholson joins Yahoo Finance Live to discuss market volatility, inflation, recessionary risks, and the outlook for investors.

Video Transcript


- It's a bit of an unusual day here at Yahoo Finance as we track a rally in stocks and of course, the very important action that still happens in the markets, even as we also track this landmark ruling by the Supreme Court. We go back to the markets category for just a moment here. Our next guest says investors should expect markets to be under pressure for the next three to six months. Joining us now, RiverFront Investment Group global fixed Income CIO Kevin Nicholson.

Kevin, it's been a minute. It's good to see you here this morning. As we see what's been an unusual period in markets, particularly for the fixed income side of the equation, where we've seen yields going down even as interest rates, benchmark interest rates, are going up, how are you sort of thinking about the recent action we've seen?

KEVIN NICHOLSON: So thanks for having me, Julie. One of the things that I think right now is that there has been an overreaction in the fixed income market. We've been seeing this rally over the last week, since we reached those highs of close to 3 1/2%. You've been seeing the 10-year come down pretty rapidly over the last week or so. And I really think that people were thinking the idea of recession was going to happen, you know, it was right around the corner. I don't see that.

All of the recession indicators that we look at, nothing in the market is telling us a recession is imminent. And so I think that the Fed is going to continue to raise rates, as we have-- they have said. And we think that yields have not peaked and that they're going to go back up, and we're going to touch those recent highs that we made on the 10-year just a week or so ago.

- Not imminent, but can the Fed correctly steer around this without triggering one?

KEVIN NICHOLSON: I don't-- I think it's going to be very hard for the Fed to stop a hard landing, Brad, to be quite honest. When we did a calculation prior to this last Fed meeting, they had a 4.1% core PCE end of the year target. Now it's 4.3%. So what that means is that over the last 12 months, on average, core PCE has been going up 40 basis points, or 0.4%, month over month. In order for them to hit that 4.3% target at year end, it has to drop to 0.35% month over month.

And I don't think that they can do that. So I think that inflation is going to remain stubbornly high in the short term, and so I don't think that they're going to-- I think that the Fed is going to continue to overtighten. And they've already said that 7-basis-point hikes are on the table for the next meeting, and I think that they're going to probably have to hike most of the remaining meetings this year.

- Kevin, we have heard that a lot of firms are allocating more to cash than they have historically, certainly over the past couple of years. Are you guys doing the same? And if so, what would change your mind?

KEVIN NICHOLSON: Yes, so we've basically reduced the level of risk in our portfolios about a week or so ago. And I think that-- and that was because we came to the determination that we were going to have downside pressure on equities as the economy began to slow. But what we're looking at is we're looking for opportunities to redeploy some of that cash back into the fixed income markets because for the last couple of years, we haven't had an opportunity to get income into the portfolios.

We've been using equity strategies in order to do that because people always kept saying that there was no other alternative, Tina. Well now, we're really focused on Patty, pay attention to the yiel. And right now, fixed income is greatly outyielding the S&P earnings yield, or excuse me, the dividend yield. So now is an opportunity for us to start looking to redeploy some of that money that's on the sideline.

- Interesting. All right, Kevin, it's good to see you. Thank you so much. Kevin Nicholson RiverFront Investment Group global fixed Income CIO, good to see you, appreciate your time this morning.