Taxable Investors Eye Rate Outlook, Dumping T-Bonds


Amid investor expectations that the Federal Reserve is getting closer to tapering its bond buys, taxable bond fund performance in November hinged on interest-rate sensitivity.

The more sensitive a category was, the worse it performed.

Treasury funds were among the worst laggards, losing 1.13% on average last month, according to Lipper Inc. preliminary data.

Worst in performance were emerging markets local currency funds, losing 3.25%. Next were emerging markets hard currency funds, down 2.05%. Corporate BBB-rated funds lost 0.34%.

Flexible income funds, up 0.42%, led the few categories that gained ground, especially among intermediate and long-dated funds. High-yield funds, which get most of their yield from credit risk rather than rate risk, were down 0.36% .

"The primary driver has been the prospect of Fed tapering," said Rick Rieder, manager of $10.4 billion BlackRock Strategic Income Opportunities . "The most recent government payroll report, which showed surprising strength, also pushed people to bring forward their expectation that tapering would start in December or January, or March at the latest."

Investors, especially retail investors, continued their efforts to protect themselves from rising rates. Redemptions were generally heaviest in funds holding long-dated bonds, said Rieder, who is also chief investment officer of BlackRock.

Emerging markets funds were hard hit because tapering is expected to help strengthen the U.S. dollar, which will mean less U.S. consumption of emerging markets commodities. Also, tapering will be a sign of stronger U.S. GDP growth.

Rieder expects the start of Fed tapering in December. "The markets will overreact even though reducing ($85 billion per month in bond) purchases by $10 billion a month is not that much and is already priced in now," he said.

Before investors began to worry about tapering, the yield on 10-year Treasuries got as low as 1.66% in April. Now it is around 2.80%. That's not far from an area a little higher than 3.00%, where it would be without Fed stimulus, he said.

After an initial overreaction, Rieder does not expect the market reaction to be as bad as last spring's.

Taxable Outlook

He likes commercial mortgage-backed securities ( CMBS ), high yield, peripheral European debt, and debt from the Philippines, Malaysia and parts of China. He also likes some long-dated tax-exempt bonds issued by transportation authorities, universities and health care facilities as well as some state general obligation bonds.

He owned a Hilton USA Trust bond that showed why he liked CMBS. Rated BB by S&P -- below investment grade -- it was secured by a lot of Hilton's U.S. real estate. And it matures in just five years. Its short maturity gives it low interest-rate sensitivity, Rieder said. And its yield is 5.32%.

Tax-exempt funds were weak in November, losing 0.27% on average.

Investor fear of Fed tapering was the main culprit, said Philip Condon, head of U.S. fixed income and muni bonds for Deutsche Asset & Wealth Management.

Condon sees a continuation through December, fueled by tax-loss swapping as investors offset taxable gains elsewhere in their portfolios. But he expects the muni market to firm in January in part due to investors reinvesting quarterly coupon payments.

He likes the 10- to 30-year segment of the yield curve. That segment was hurt the most recently, so prices there have become the most attractive.

He held a New Jersey turnpike bond with a 5% coupon, maturing Jan. 1, 2035, with a par call on Jan. 1, 2022. Rated A+ by S&P, the bonds are secured by toll revenue.

Its November total return was 0.26%, with its yield rising 2 basis points. Its yield backed up less than increases of 6 basis points by the MMD AAA muni index, 20 basis points for the 10-year Treasury 20 and 18 basis points for the 30-year Treasury.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Mutual Funds

Referenced Stocks: CMBS

Investor's Business Daily

Investor's Business Daily

More from Investor's Business Daily:

Related Videos



Most Active by Volume

  • $15.31 ▼ 0.71%
  • $32 ▲ 6.38%
  • $15.98 ▼ 0.19%
  • $8.57 ▲ 4.51%
  • $123.25 ▼ 0.80%
  • $40.97 ▼ 0.58%
  • $105.52 ▲ 0.40%
  • $5.67 ▼ 4.55%
As of 3/27/2015, 04:15 PM

Find a Credit Card

Select a credit card product by:
Select an offer:
Data Provided by