ETF Trends, the popular ETF web blog, hosted another successful ETF Virtual Summit on Wednesday. One of the most important segments of the virtual conference was the final segment which was dubbed Creative Income Strategies in a Rising Rate Environment moderated by Jim Pavia, featuring Tim Gramatovich the CIO of Peritus Asset Management, William Belden from Guggenheim Investments and Bill Housey from First Trust Portfolios.
The importance is captured in the title of the segment. The investment industry has mostly conceded that interest rates will have to head higher. Recently Barron’s declared that the 31 year bull market in bonds had ended last May when outgoing Fed Chairman Ben Bernanke put a scare into capital markets with talk of altering the Fed’s quantitative easing policy.
The reality is that most advisors have not had to navigate through a rising rate environment beyond a couple of months. Clients will count on their advisors to help them address this in their portfolios in such a way to provide income without enduring equity-like down side that some bond funds will likely confront whenever rates do start to rise meaningfully.
Belden and Housey were generally on the same side of the trade in terms of the need to prepare portfolios for rising rates.
Belden noted that we have now entered an era of return free risk which is a humorous way of pointing out the dim prospects for plain vanilla bonds. As an example, Belden said that 29 basis point move up the yield of the ten year US treasury would wipe out an entire year’s worth of return because of the nature of how bond prices decline when rates rise. Bonds may not be as safe and secure as investors think which could come as a nasty surprise to clients.
Housey added that there is very little upside today in traditional fixed income although high yield bonds may offer some respite because they have historically outperformed in a rising rate environment. Bank loans and high yield bonds were the best performers in 2013 having positive returns in an otherwise negative year for most segments of the bond market.