Bonds look increasingly attractive as equities plummet and recession risks grow. Here's how to invest in fixed income to maximize returns, according to TD Securities' Head of Global Rates Strategy. (2024)

"Fixed income starts to look attractive if recession risks are growing," said Priya Misra, head of global rates strategy at TD Securities, in a recent interview with Insider. "Through the course of the next year, we are more positive and constructive on fixed income."

Timing is everything when it comes to the bond market, since it's important to lock in higher interest rates before the Federal Reserve begins cutting them again. As for how high the central bank will hike interest rates this time around, Misra is more on the hawkish side, predicting a terminal rate of around 5.5% due to stickier inflation.

Misra also believes that the stock versus bond dichotomy will continue to grow in 2023. "In general, we are negative on equities as an asset class, at least at the start of the year," she added.

Try a barbell strategy to optimize returns

Misra believes that investors are best served by adopting a barbell strategy, buying both the front and back end of the yield curve.

After years of yielding almost zero, front-end bonds and cash are now earning their keep by helping investors mitigate opportunity costs. "You have dry powder; you can invest it when different markets price in recessions," Misra explained. "I think having liquidity is key so that you're not forced to sell in a state where the markets are not super liquid and nobody wants the asset; you'll end up selling at worse levels."

To offset these more liquid assets, Misra recommended investors look to pick up yield, such as with mortgage-backed securities, which she said look attractive at their current spreads. There's also no credit risk to these types of assets, since they're guaranteed by government-backed agencies such as Fannie Mae and Freddie Mac.

Inflation-linked bonds also stole headlines this year, and Misra said that they'll continue to be a good buy going forward, especially since she believes inflation will remain at around 3% by the end of 2023. But Misra definitely prefers longer-end bonds for their stability in the face of an economic slowdown, and continues to believe that the 10-year US Treasury will be the best store of valuefor investors over the next decade.

"Over time as inflation comes down and the Fed eases, I would say the 10-year's better than the very front end because I think duration risk is attractive when the economy slows down," she explained. However, Misra believes that the current 10-year Treasury yield of around 3.7% feels a little too low, especially since she forecasts rates climbing slightly higher in the near future.

On the other hand, Misra isn't particularly a fan of investment-grade or high-yield corporate bonds in the backdrop of falling earnings. "Investors may want to demand more spread for buying corporate bonds in an environment where growth is slowing and it's not clear which corporate can handle the rise in interest rates easier," she explained. While investment-grade bonds have less default risk, Misra believes investors may find it hard to pick and choose winning sectors within a high-interest-rate economy.