Spring is here again, and inevitably my thoughts turn to baseball. It is a time of year when optimism abounds and the sights, sounds and smells of America’s pastime bring smiles to faces young and old.
While I watch my beloved, yet cursed, New York Mets, the responsible voice on my shoulder tries to rein it in and refocus on work; in this intersection between the fixed income markets and baseball, some interesting insights come to the surface. The new rules of the game have changed the playing field for both baseball and bond managers. Baseball managers and players need to adapt to these rule changes, much like active portfolio managers must react to changes in interest rates and the economy every minute of every day.
The Pitch Clock and Bond Duration
The introduction of a pitch clock is meant to speed-up the game, and it has done just that, with the average duration of games in 2023 25 to 30 minutes shorter than previous years. The acceleration of the game is putting both batters and pitchers at a disadvantage. Batters have less time between pitches to re-set themselves and think about how the pitcher might attack them on the next pitch. For pitchers, faster innings may be straining pitchers’ endurance, causing shorter outings, and an increasing prevalence of injuries.
In fixed income markets, duration was everyone’s friend during the 35-40 year bull market in bonds and viciously flipped to a disadvantage as the Fed was forced to raise interest rates to conquer inflation. Now is the time for investors to start contemplating lengthening duration again, as the economy begins to slow, and we approach a Fed pause and eventual cuts in interest rates.
Shift Ban and the Value of Truly Skilled Defenders and PMs
A second rule change this year is the banning of the shift for defensive positioning. The shift’s original intention was to turn hard-hit balls into outs by placing infielders in spots where there would be a higher probability the ball would find them. By taking this advantage away from fielders, Major League Baseball is restoring balance and giving hitters a better chance. All-star shortstop Francisco Lindor predicted that this would also allow infielders to play more freely and to showcase their athleticism and ability, which would widen the gap between great infielders and mediocre ones and substantially increase the value of premium defensive infielders.
Bond markets have moved in lockstep for years: lower together during the bull market and lower rates, and then selling-off together during the Fed’s rate hike cycle. Now we have reached the point where dispersion will increase; individual companies and their bonds will trade more on their specific performance rather than simply moving with the market, and skilled active managers will thrive. It will highlight those managers who can identify improving credits, anticipate positive catalysts and just as importantly, avoid negative surprises and the losses that follow when an economy is slowing into a recession. The tide is going out, and now investors will see which portfolio managers truly have the skills to outperform, just as Gold Glove infielders demonstrate their own value on the diamond.
Baserunning Changes Require a More Strategic Mindset
A third rule change in 2023 is the combination of larger bases and limiting the number of times pitchers can step off the mound or throw over to first base. The intention is to increase the frequency of stolen bases by making it easier and safer for baserunners to execute a steal. It forces pitchers and catchers to be more tactical when they attempt a pickoff throw and to vary their tempo and delivery to keep runners off balance. Baseball has always been a game where strategy and tactics were important, but now the stakes are even higher.
Bond markets have always been a place where tactical investing was prudent, but with the increasing speed of rate cycles and economic cycles and the volatility they create, tactical investing has never been more crucial. The ability to identify trends, inflection points and catalysts, adjust interest rate sensitivity and credit quality accordingly and trade around volatility to create additional returns in sideways and choppy markets, will allow strong tactical managers to outperform in markets where everything isn’t just going up or down together.
Batter and Investor Up
Summer is around the corner, and hopefully I’ll have left you with some things to think about as you watch your own hometown team. The new rules of the game have changed the playing field for both baseball and bond managers and seeing these similarities will allow you to re-evaluate your strategy in fixed income investing, where dynamic tactical investing has never been more valuable.
Jeffrey Rosenkranz is a portfolio manager of the Shelton Tactical Credit Fund.
