1. Beware the middle of the yield curve. As my colleague Russ Koesterich notes in a recent Blog post, we are practicing caution within the short to middle part of the Treasury curve and are underweight Treasury bonds with three- to seven-year maturities. This is where the market is re-pricing new Fed expectations and we expect volatility here in coming months.
2. The tails of the curve may provide more value. While the name of the game in 2013 was shorter duration, investors should be well suited to take a more nuanced approach to interest rate management now. Very short maturity bonds may be less impacted by Fed policy in the near term, as it appears that we are still some ways off from the Fed actually raising interest rates. Additionally, longer maturity bonds have actually done fairly well in 2014 and we expect will still offer some value going forward as they tend to be more impacted by changes in economic growth and inflation, neither of which appears ready to spike in the near term.
3. Consider tax-exempt munis and emerging market debt. We are currently overweight munis due to strong credit fundamentals, and are neutral to emerging market (EM) bonds overall. I explored the current EM debt landscape in a recent Blog post and you can find it here.
In my next post I will take a closer look at how the Fed works, focusing on how it reaches a consensus, and what this means for the end investor.