“If you look at spreads of BBB vs. A-rated corporates, we’re able to pick up a significant premium by holding BBBs,” Schneider said. “But in our mind, there’s often little distinction between these securities. … One area where we tend to find value is by targeting BBB Corporates, which offer a yield pick-up over A-rated corporates but have a similar risk profile.”
Meanwhile, higher quality debt such as long-term Treasury bonds now expose investors to greater risks. Looking at the duration of the Barclays U.S. Aggregate Index since December 2008, interest rate risk has increased 50% as the benchmark bond index increased its Treasury exposure. On The other hand, yields have declined in response to unprecedented global monetary policies.
Bond investors seeking to diversify their bond portfolios and limit interest rate risks may turn to actively managed short-term strategies that could allow for more options to protect capital and manage liquidity while generating income.
For example, the PIMCO Low Duration Active ETF, (NYSEArca: LDUR) and the PIMCO Enhanced Short Maturity Active ETF (NYSEArca: MINT) are backed by an active management team to select opportunities in low-duration bonds. The active manager has the flexibility to go beyond traditional government debt and include other debt securities like corporate credit to diversify and limit potential risks.
“We’re able to identify value in each of these sectors and tailor a portfolio that has a return profile we like, but with strong downside protection as well,” Schneider said. “MINT is able to actively allocate across sectors, whereas a passive index strategy is by definition constrained. In this way, we’re able to generate a higher yield with less interest rate risk.”
Financial advisors who are interested in learning more about fixed-income strategies for 2017 can watch the webcast here on demand.