Coming into 2018, Ignacio Sosa expected rising interest rates and greater market volatility.

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Sosa, who’s director of the product solutions group at DoubleLine Capital in Los Angeles, said that his firm’s CEO forecast earlier this year—”when the S&P 500 was up almost double digits”—that U.S. stocks could end up in negative territory at the close of 2018.

“And we’re sticking to that view,” he said in a mid-May interview. U.S. stocks have already dipped into negative territory a number of times this year, “which means it’s going to be a challenging year for risk assets. It’s also a challenging year for fixed income.”

Read: Choosing inflation-linked over fixed-rate bonds

May’s S&P Dow Jones monthly report for the S&P 500 shows the index had one-month total returns of 2.41% last month, three-month total returns of 0.19%, and 2.02% total returns year to date. Only its three-month price returns as of May 31 were negative, at -0.32%.

Still, during uncertain times where monetary policy shifts are a major factor, Sosa says it’s better to “have a portfolio that has a relatively low sensitivity to U.S. interest rates.” His firm sub-advises the Renaissance Flexible Yield Fund, which as of mid-May had “an effective duration of under 1.3 years, which is really relatively low, with a yield north of 4%. The point is your yield is significantly higher than your duration, which gives you a lot of protection.”

There are a number of reasons for the rise in rates south of the border, Sosa says, and one is growing U.S. budget deficits. This is happening “quite substantially and at a time when there’s no recession,” he says.

The U.S. federal government deficit totalled US$385.4 billion for the first half of the budget year, a 12% jump from the same period a year earlier due to tax cuts signed in by the current administration. The Congressional Budget Office estimates that the budget deficit this year will total $804 billion, a $140 billion increase from last year.

Read: U.S. government ran US$214B surplus in April

“So, imagine what things would look like on the day we have a recession? We’re not predicting a recession any time soon, but rising budget deficits mean more Treasurys are going to hit the market, at the same time the [Federal Reserve] has been reducing their holdings.”

“We’re not at a point of alarm,” Sosa adds, but he and his firm are monitoring to what levels rates will rise and how quickly that’s expected to occur.

According to the minutes of the Fed’s May 1-2 meeting, Federal Open Market Committee officials were upbeat about the economy; the unemployment rate continues to fall and inflation has been rising. The Fed stood pat in May, but a June 13 hike is widely anticipated (CME Group’s FedWatch Tool shows there’s a 93.8% probability a hike will be announced this month).

“We have structured a portfolio that we believe will hold well during periods of rising interest rates,” Sosa says.

Read:

Fed on track to gradually hike rates: minutes

U.S. central bank must remain independent, says Fed Chair Powell

What strong U.S. growth means for Fed rate hikes

Tilting away from cyclicals: Are we there yet?

BoC holds key rate at 1.25%, but hints at hikes to come

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