Even after a turbulent few weeks in bond markets, Lynda Schweitzer remains committed to a duration-based strategy in fixed income.
Speaking to Investment Officer in a follow-up interview a month after a Natixis Investment Managers media event in Paris, the senior portfolio manager at Loomis Sayles acknowledged recent volatility but maintained her conviction. “Ultimately, I do,” she said when asked if she still believed in extending duration. “That’s the short answer.”
Shifting curve dynamics
At the time of the Paris event, the spread between two-year and thirty-year US Treasuries stood near 65 basis points. It has since widened to just under 100 basis points, a sign of a steepening yield curve. Yet instead of a rally in longer-dated bonds, typically seen during equity sell-offs, yields pushed higher.
The market reaction to Trump’s tariffs announcement “was very surprising,” Schweitzer said. “Usually when you get equity markets and credit spreads widening like we saw last week, you would expect U.S. duration to rally.”
In fixed income investing, adding duration means increasing exposure to longer-maturity bonds that are more sensitive to changes in interest rates. The higher the duration, the more a bond’s price rises when rates fall—and drops when rates rise.
Market flows and supply
As co-head of the Loomis Sayles fixed income team, a boutique affiliate under Natixis, Schweitzer attributed the recent yield moves to technical and supply-driven factors.
“Definitely flow related… there was a big supply last week. We had tens and thirties year supply. So that’s weighing on the long end of the market,” she said. “In the background, there’s fiscal deficits and supplies. How much Treasury supply needs to come? That dominated the move last week.”
Her team used the sell-off as a buying opportunity. “We added duration in our portfolio last week on the backup,” she said. “We still believe in the long run that this is damaging to growth. I still think that duration is the right strategy.”
At the same time, Schweitzer acknowledged the need for flexibility. “We’ve had a lot of conversations on our team. We’re going to have to be nimble around that. It’s probably not a full duration for the long term. But for right now, I think it is the right decision.”
Dollar and dealer limits
Repositioning out of the dollar may also be contributing to recent market dynamics. “If the dollar is going down, for some investors the only way to get out of the dollar is to sell what you hold,” she said.
She also pointed to reduced balance sheet capacity. “There was likely less capacity by primary dealers to take 10s and 30s because of the supply that was coming.” The US has seen strong inflows over the past two years, she added, due to attractive yields and equity performance. “It’s not unusual to expect that given the uncertainty now, there might be some reversal of those flows.”
Fed under pressure
Schweitzer also addressed concerns over Federal Reserve independence, amid recent public criticism from former President Donald Trump. “I want to believe that our institutions are strong enough to withstand some chatter on social media,” she said. “The central bank is supposed to be independent. I think Powell is acting independent. There’s no reason for the Fed to be cutting.”
Trump has Fed chair Powell in the crosshairs
She acknowledged, however, that Powell could come under further political pressure.
“This was always a fear that Powell might be in the crosshairs of Trump. We’ll see how this plays out.” While Powell’s term runs through May 2026, Schweitzer noted: “It would be unusual to remove a Fed chair without cause. But… you would have to expect that any replacement would be loyal to Trump.”
Europe’s spread dynamics
Turning to the eurozone, Schweitzer said she closely monitors the spread between German Bunds and US Treasuries. “Those types of relative value trades can be excess return drivers in our portfolio,” she said.
She described last week’s widening as a distortion. “Treasuries have rallied this week off their wide levels. You’re starting to see it move back towards where we were pre last week,” she observed.
Outlook and opportunity
Looking ahead, Schweitzer said the outlook remains unclear. “I wish I could give you clarity around what it’s going to look like going forward. But I think this is kind of our environment now,” she said.
Still, she sees reasons to stay active. “Hopefully it means opportunity for active managers like us,” she said. “On some level, it’s not good when it’s boring, but I would take a little boring right now.”
Further reading on Investment Officer:
- Market stress puts classic stock-bond correlation to the test
- Roelof Salomons: ‘Increased frequency of internal memos’
- No one will win when the dollar starts wavering