Fixed income earns new image
Wall Street 'bond bores' have defied predictions of their demise in recent years, illustrating that those who sell down their fixed-income portfolios over worries of a rising interest-rate cycle could be committing an investment foul.
Jerry Webman, senior investment officer of New York-based Oppenheimer Funds, says worries about rising inflation, higher rates, and a possible bond market rout appear overdone.
He believes those who abandon the time-honoured principles of diversification by ditching their bond portfolio could be heading for rough waters.
'I don't know that I would argue that rates are so low relative to inflationary expectations and even the real value of capital,' he says.
While some market watchers are raising red flags on the inflation front, he says the bond market has reacted relatively calmly, leaving those who had predicted a crash in fixed income pondering what the market knows.
Mr Webman says the rising yield curve on longer dated Treasuries clearly shows there is an expectation of rising rate increases, but it is not clear that we have entered into a major upward rate cycle. 'The market is not stupid, in fact the market is a lot smarter than a lot of us,' he says. 'This idea that rates are so low they have to go up is questionable. I think that rates are low for some very good reasons.'
Mr Webman believes tame consumer price data - despite dramatic rises in US real-estate and energy prices - means the Fed will have a lot more flexibility in raising rates than most market watchers think. Strong labour productivity also means there will be little pressure to raise wages or prices. He advises investors to maintain a significant portion of their portfolio in bonds as a defensive hedge.
'Remember that downside risks to the economy still exist and high credit-quality bonds may provide some diversification advantages,' he says.
