Viewpoints
2020 Outlook: Investment Grade Fixed Income, part 2

Timely insights from portfolio managers and industry experts on key financial, economic and political issues.

The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Eaton Vance disclaims any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Eaton Vance are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Eaton Vance strategy. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness.

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      By Brian S. Ellis, CFACalvert Fixed Income Portfolio Manager

      Boston - Our outlook is for increased caution. We see a lot of risks in markets, both late cycle and geopolitical. While we may gain more clarity about Brexit and China, 2020 has new risks such as the US presidential election.

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      Our concern is that markets are too confident in the ability of global central banks to insulate the economy from these risks, and valuations are not reflecting those risks.

      Cautious positioning

      Given our cautious outlook, we are positioning our portfolios to increase credit quality, moving shorter in duration1 and increasing liquidity.

      We believe that the US consumer balance sheet is very strong, and we prefer to have most of our credit exposure there. US corporate balance sheets, on the other hand, are more vulnerable to late-cycle risks given some of the leverage that they have taken on. So we are much more selective in the corporate credit market.

      We continue to prefer a slight underweight stance to duration. Our view is that investors are not being compensated to take long duration positions, given where valuations are.

      Positive inflation outlook

      We believe that the inflation outlook is quite positive, and it's not being priced correctly by markets. In our view, inflation assets offer very good relative value, as several structural components of inflation have been rising. We also think that the easing by the US Federal Reserve (Fed) in the second half of 2019 should continue to support inflation.

      So we continue to favor inflation-linked sectors, such as TIPS,2 and we prefer to position our portfolios for a steeper yield curve.

      Bottom line: We believe that active management in fixed income is well positioned to outperform passive — especially over the next 12 months. There are a lot of downside risks in our outlook, and we believe that active managers should be better set up to manage that downside risk than a passive index.