With the Federal Reserve raising interest rates a further 0.25% on Wednesday, investors may be looking at their portfolio construction to see how their fixed income assets are interacting with their equity assets.
ETF Trends publisher Tom Lydon spoke with Karen Schenone, Fixed Income Strategist at BlackRock iShares, at the 2017 Morningstar Investment Conference in Chicago April 26-28 to talk about fixed income investing strategy.
“What we are seeing right now is a lot of advisors who were short-duration the past couple of years, they’re adding it back to the portfolios,” Schenone said. “One of the more efficient ways to do that in this market is to think about adding it through investment grade credit, rather than Treasuries, because it is going to come with a little bit of extra income and the risks are marginal compared to Treasuries at this point.”
In a rising rate environment, Schenone said advisors need to consider how conservative they are going to be, what kind of risks are they willing to take, and what their asset allocation should be.
“I still think the Bloomberg Barclays Aggregate really stands the test of time as being that benchmark that benefits from that fight for quality,” she said. “However, if they do need more income, maybe they can look at bench marking in something like the Barclays Universal that is going to have high-yield emerging market debt and have a little bit more income and actually less volatility over time.”
In terms of global fixed income opportunities, Schenone said a lot of people have avoided global fixed income for the currency risk.
“We’re seeing people implement that either through currency hedged strategies or maybe now they’re willing to take on the local currency because they think the dollar could be a bit weaker going forward,” she said.
Whenever there’s growth in the economy and rates rise as a result of that to combat the inflation, Schenone said it’s great for credit risk.
“We see credit spreads tightening in and you’ll see high-yield and investment grade outperform other categories,” she said.
The Fed, chaired by Janet Yellen, said on Wednesday it was preparing to start reducing its $4,500bn balance sheet later in 2017, although it didn’t give a specific date.
Schenone said this was an exciting prospect.
“I think everyone’s looking forward to if the Fed starts tapering their balance sheet – what is that going to mean,” she said. “But we’re still seeing all this foreign demand for US fixed income securities kind of keeping a lid on rising rates. So we think they might drift a little higher, but you’re not going to not going to go back to six, seven, eight percent yields anytime soon.”
For more on Fixed Income ETFs, please visit our fixed income category.