We customize bond strategies for client portfolios based on our own research and insights from the people we feel are the best and brightest in the investment world.
Here’s what we think is worth paying attention to over the coming months:
Waiting to see higher rates? Don’t hold your breath. While higher interest rates are certainly coming somewhere down the road, we believe the Fed is in no rush to raise rates. The economic recovery is intact but the pace is modest, inflation is firmly under control, and labor markets still display slack. We think, therefore, that rate hikes will be gradual and less damaging than many expect.
A plain vanilla bond approach won’t cut it. To generate the bond returns most clients want, we need to venture beyond the traditional bond indexes and seek more diversified solutions. In short, we need to turn over a lot more rocks. To paraphrase BlackRock Chief Investment strategist Russ Koesterich (BlackRock is the world’s largest asset manager, with over $4 trillion in assets), investors looking for yield need to cast a wider net than they have in the past.
Look off the beaten path. There’s just no way to generate the 4-5% yields of the past without taking some investment risks. Investors might want to consider sectors like preferreds, high yield, municipals, emerging market bonds, and even higher dividend equity strategies to capture the yield they want. In fact, veteran bond manager Kathleen Gaffney of Eaton Vance suggests considering dividend stocks for a place in today’s non-traditional bond portfolio, since stocks may now have “less risk” than bonds.
Short-term bonds may not be the refuge you think. Many investors have fled to short maturity bonds with the hope they’ll provide shelter from higher rates. That strategy could seriously misfire, since the shorter end of the yield curve (2 to 5 years maturity) could be the area most vulnerable to rate changes as the yield curve flattens out. It’s a good idea to hold some shorter-term bonds as part of a diversified bond portfolio, but don’t fall for overly simplistic views of how the broader bond market will play out over the next few years.