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With the Fed taper imminent, possibly as soon as next month, bond investors should be preparing their portfolios for higher interest rates. Regular readers of Learn Bonds have been given plenty of advice about what to own and what to avoid.
But what should you do after the Fed begins to scale back the level of bond purchases it makes, as part of its quantitative easing program? According to Wells Capital Management’s Margie Patel, junk bonds are the way to go.
In an interview with BusinessWeek Patel says:
“Speculative-grade debt will be attractive even after the Federal Reserve begins to reduce its bond purchases because Treasury rates won’t rise much higher.”
Patel went on to say.
“With inflation low, the dollar strong and the economy OK, it’s hard for me to see how much higher Treasuries can go over the next six to 12 months. When you put it all together, a 3 percent 10-year Treasury looks like a pretty good deal.”
“While tapering may cause rates to rise in the short-term, Treasuries would rally because the market would have clarity on the Fed’s plans.”
Margie Patel, is Managing Director and a senior portfolio manager with Wells Capital Management, who oversees more than $1.5 billion.
Todays Other Top Stories
FT: – Global corporate bond issuance at lowest level in five years. – Global corporate bond issuance has this month fallen to the lowest level in five years as market turmoil triggered by rising US Treasury yields persuades companies worldwide to shelve funding plans.
Income Investing: – Puerto Rico Munis: Tempting yields, troubling finances. – There’s a debt spiral in Puerto Rico that will not turn out well unless there is a dramatic turnaround in the economy,” says Dan Heckman, senior fixed-income strategist at U.S. Bank Wealth Management in Minneapolis.
Learn Bonds: – Realty Income – Capture yield without buying the common stock. – During the recent rise in interest rates, the negative price performance of bonds and the common stocks of mortgage REITs and equity REITs has received a lot of attention. What’s received less attention, however, is the selloff that’s occurred in many preferred stocks.
Bloomberg: – Investors dump Emerging Market bond funds. – Bloomberg’s Manus Cranny discusses emerging market bonds and the impact of Fed tapering talk.
Forbes: – Quantifying the cost of the recent mass exodus from muni bond funds. – The swift rise of interest rates in tax-exempt municipal bond markets this spring serves as a useful case study of how panicked investors can collectively become their own worst enemies.
ETF Trends: – Treasury ETFs may be due for a bounce. – Unloved ETFs tracking U.S. Treasury bonds are set up for a rally if investors get caught leaning the wrong way.
FT: – Global corporate bond issuance at lowest level in five years. – Global corporate bond issuance has this month fallen to the lowest level in five years as market turmoil triggered by rising U.S. Treasury yields persuades companies worldwide to shelve funding plans.
Bloomberg: – Louisiana Teachers’ pension fund to invest in global junk bonds. – The Teachers’ Retirement System of Louisiana, the manager of $14.7 billion in public employee pension funds, hired AllianceBernstein LP (AB) last week to invest $325 million in global high-yield debt.
John Dowdee: – High retirement income with floating rate loan funds. – As a retiree, I am always searching for sources of high income but lately I have worried about rising interest rates. Floating rate loans Closed End Funds seem to offer the best of both worlds, providing over 6% income plus a hedge against increased rates. To asses this asset class, I analyzed the risk and reward associated with floating rate loan over the past several years.
John M. Mason: – Bond Yields, Federal Reserve tapering and emerging market countries. – The major uncertainty of the fall is, of course, the tapering of Federal Reserve security purchases. The uncertainty is not due to a question concerning Federal Reserve tapering taking place. Almost everyone…in the world…believes that the tapering of Federal Reserve security purchases will take place this fall…and more specifically, they believe that it will begin around the middle of September. The question marks pertain to the path the tapering will take.
Income Investing: – Barclays sees more upside in corporate bonds. – Barclays, which last week upped its 10-year Treasury yield forecast, offers a fairly upbeat take on corporate bonds, saying there’s still upside in both high-yield and investment-grade corporates, even with rates on the rise and everyone dreading the Fed’s next move.
Lubbock Avalanche: – Municipal bonds are demanding investors’ attention – again. – Municipal bonds usually don’t get much attention unless something’s wrong. They’re getting attention now.
ETF Trends: – An EM junk bond ETF crushes Treasuries. – Although the environment for emerging markets bonds is currently challenging, put things mildly, HYEM may offer opportunity in the future.
Market Oracle: – U.S. Treasury bonds are oversold. – Has there ever been an asset class bombarded by such intense negativity in such a short period of time? Fed Chairman Bernanke’s warning in May that the Fed would soon begin to ‘taper’ its QE bond-buying stimulus program brought ‘The End of Bonds’ headlines out in force. And bond investors responded.
Bloomberg: – California rising with banks vying to sell new debt. – California, which relies on private deals with banks for almost 80 percent of its bond offerings, plans its biggest competitive debt sale in six years as the state’s relative borrowing costs sink to the lowest level since 2008.
Las Vegas Sun: – Municipal bonds are demanding attention, again. – Municipal bonds usually don’t get much attention unless something’s wrong. They’re getting attention now.
Dividend.com: – What is a Dividend? – For those new to investing, here’s everything you need to know about dividends!
During 2013 the correlation b/t the 10y UST & EM assets: EM Bonds 0.91, EM Equities 0.81, and EM currencies 0.71
— David Schawel (@DavidSchawel) August 26, 2013
Puerto Rico Prepa bonds (electric authority) maturing in 2016 just traded at 4.57%… unhappy times #muniland
— Cate Long (@cate_long) August 26, 2013
Janney: Fed's taper is already priced into current trading levels as ten-year interest rates trading at or slightly above fair value
— Cate Long (@cate_long) August 26, 2013