Bond Investing: Finding Opportunities Takes Patience

The Federal Reserve will raise rates this year, probably twice, agreed three bond fund managers on the Unearthing Bond Value panel at the 2015 Morningstar Conference in Chicago on Thursday.

Laird Landmann, portfolio manager at TCW, said when the Fed moves, it will be fast. Likewise, Gibson Smith, chief investment officer for fixed income at Janus Capital Group, concurred that two rate hikes will come this year. 

Elaine Stokes, a vice president of Loomis, Sayles and portfolio manager for the Loomis Sayles fixed-income group, added that the Fed will raise rates because it “needs the tools” for flexibility and they’ll do it “when the market is ready.” How much the Fed raises rates will be determined by demographics, technology and growth outside the United States, she said.

Landmann said TCW also expects the yield curve to flatten “as they unglue the front end of the curve…and whether modest or extreme, it will have an impact, especially on mortgage backed securities.” He added that as a conservative investment firm, “what goes on in Europe and Greece doesn’t really impact our portfolio.” And he urged caution, saying that the “excess returns in bonds have been extraordinary in last few years,” but won’t go on forever. 

Where Are the Opportunities? 

Stokes thought Greece volatility was a short-term opportunity. She also thought Russia was showing potentially interesting signs, while Loomis also is looking more closely at corporate bonds.

Smith agreed about corporate bonds, stating that as firms move into defensive positions with lower yields, “management teams make mistakes” and this repricing creates opportunities. “Always look for these opportunities [in] missed earnings, buy backs,” he said. 

High yield bonds still had value and “could be a nice coupon clipping environment,” Stokes noted. She said it was time to be bond pickers of specific opportunities, but investors had to be patient. Landmann advised to “dig a hole [looking for value] but not too deep.” He recommended building a nice liquidity reserve.

Investing in emerging markets got big thumbs down from all the managers.