We continue to believe an actively managed portfolio consisting largely of high yield bonds is still the best way to be positioned in this environment. Additionally, it remains very unclear to us whether much of the rate rise expected by market participants has already been priced in.
While tapering means the Federal Reserve will be backing off of purchasing both mortgages and Treasuries, there remains substantial demand from fixed income investors, particularly pension plans focused on LDI, or liability driven investing.
But if rates do rise further, higher starting yields help cushion the portfolio from interest rate movements, and historically, this year included, high yield bonds have actually performed well during periods of rising rates (see the historical data in our piece “High Yield in a Rising Rate Environment”). We believe that those who expect a broad allocation to bank loans to be the answer to generate returns in this environment may well be disappointed.
1Acciavatti Peter, Tony Linares, Nelson Jantzen, CFA, Rahul Sharma, and Chuanxin Li. “Credit Strategy Weekly Update.” J.P. Morgan High Yield and Leveraged Loan Research, North American Credit Research. December 6, 2013, p. 1.
2Acciavatti Peter, Tony Linares, Nelson Jantzen, CFA, Rahul Sharma, and Chuanxin Li. “Credit Strategy Weekly Update.” J.P. Morgan High Yield and Leveraged Loan Research, North American Credit Research. December 6, 2013, p. 25.