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Global Bond Market Suffers From Too Much Central Bank Control: Thornburg

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The Federal Reserve’s determination to keep interest rates low along with other countries’ flood of sovereign debt into the global bond markets have forced investors to put money into risky securities that they mistakenly believe to be safe havens, a group of Thornburg portfolio managers said Wednesday at a New York press briefing.

The Fed is unlikely to engage in a third round of quantitative easing, according to Santa Fe, N.M.-based Thornburg portfolio manager Jason Brady, but he added that it troubled him to see the U.S. central bank making policy decisions that are apparently based on stock market volatility.

Plus, Brady said, central banks around the world have been on a binge of accommodative policies and debt purchases. He named the European Central Bank, the Bank of England and the Bank of Japan as being among the wealthiest central banks that have driven interest rates down globally. And with spreads holding tight across all types of bonds, he warned, yield chasers risk buying bonds with attractive interest rates today that may turn into defaults or other problems tomorrow.

“There is so much liquidity-fueled purchasing all around the globe,” Brady said. “I’d really like to get back to seeing markets that are not controlled by global central banks, but I fear that we will be in this environment for a long while.”

Brady, who is portfolio manager of the Thornburg Limited Term U.S. Government Fund and co-portfolio manager of the Thornburg Investment Income Builder, Limited Term Income and Strategic Income funds, also warned that bond exchange-traded funds (ETFs) may be riskier than they look, as they are often comprised of synthetic investments that are not bonds at all. Some ETFs use derivatives such as swaps to make them look like traditional index-tracking ETFs, but they face counterparty risk, lack transparency, and are not really understood by investors, he said.

Also on hand at the press briefing were Thornburg Municipal Bond Funds co-portfolio managers Josh Gonze and Chris Ryon, who asserted that current muni valuations are fair, despite the negative headlines about issuers such as Harrisburg, Pa., and Jefferson County, Ala.

“The vast majority of municipal bonds are going to be fine,” said Gonze, who spent about 10 years as a Standard & Poor’s credit analyst before joining Thornburg 12 years ago. “We’re seeing a mild improvement in the municipal market across the 50 states.”

Ryon said Thornburg’s current view on its muni portfolios is defensive, and he recommended that investors look for investment horizons of two to four years and a widely diversified range of credit.

“We’re defensive on the market,” Ryon said. “We think rates are going to be rising.”

Read Burton Malkiel Picks Bonds as ‘Worst Asset Class for Investors’ at AdvisorOne.


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