When Is Risky Investing Safe and Safe Investing Risky? Now.

Tim Paulson, client portfolio manager at Lord Abbett, where bonds account for almost 70% of actively managed assets, said the risk premium for investment grade and high-yield bonds “more than compensate for the risk” in the market now. He explained that the break-even yields to compensate for potential defaults versus risk-free Treasuries are at spreads several times wider than usual. In addition, said Paulson, corporate balance sheets are in good shape, debt-to-earnings ratios are low and most new corporate issues are being used to reduce debt, not for leveraged buyouts or major capital expenditures. “The fundamentals justify the spreads.”

Dan Close, a portfolio manager at Nuveen, which manages more than $100 billion in municipal bonds, spoke of the muni market’s low default rate, shrinking supply and increased tax-equivalent returns as more states raise taxes. (Interest paid on municipal bonds is usually exempt from state, local and federal taxes, which increases the tax-adjusted yield.) 

A California resident earning over $1 million who owns a California muni bond with a 5% yield, for example, would earn a tax-adjusted yield of 7.65%, after accounting for a 13.3% top marginal state income tax and 39.6% top federal tax rate.

Yan Zilbering, investment analyst Vanguard, recommended foreign bonds to offset some of the risks of equities and diversify the risks of a U.S. fixed income portfolio. He explained that U.S. bonds are “imperfectly correlated” with foreign bonds and U.S. investors are underweight foreign bonds compared to their global market share. But he noted the need to hedge the currency exposure because when the value of the dollar rises the value of foreign bonds usually fall.

In the global bond market, however, U.S. and foreign bonds have both been losing value as global yields rise, though not always at the same rate. That pattern continued Wednesday following statements from Federal Reserve Board Chair Janet Yellen that unnerved bond and equity markets. In an interview with IMF Managing Director Christine Lagarde, Yellen said long-term rates “could see a sharp jump” when the Fed begins to raise rates and stock market valuations appear “quite high” posing “potential dangers.”

Karabell said central bankers in general are not “the best guides” for a stock valuation analysis. Adam of Deutsche Asset Management, however, said, “Yellen is acknowledging there are a lot more risks out there.”

– Check out more coverage of the Envestnet Advisor Summit on ThinkAdvisor.