Bonds Still Have Legs – US-FOREX.US
All types of bonds have soared this year, from the debt of speculative-grade companies to the bonds cities and states sell to pay for schools. You might think that, the 38% return so far this year for junk bonds would mark the end of a run. But to Robert Tipp, chief investment strategist for Prudential Fixed Income Management, nearly all varieties of bonds still hold promise, even Treasurys. “We’ve come back a lot,” Tipp said, “but there’s still a long way to go.”At a gathering of Prudential’s
investment managers on Tuesday, Tipp and others discussed their outlook for the economy. All agreed that the worst had passed. “The Great Recession is over,” declared Edward Keon, a portfolio manager for Quantitative Management Associates. Another point of agreement: When economic growth returns, it will likely set a slow pace, so the investment managers expect the Federal Reserve to keep a lid on interest rates for the near future. “There’s no risk of the Fed taking away the punch bowl soon,” Tipp said. That means investments in corporate and municipal bonds should continue to perform well. Low interest rates, for instance, make it easier for companies and municipalities to refinance debt and avoid default.
One bond fund managed by Prudential, the Dryden Total Return Bond Fund, includes a mix of mortgage-backed, corporate and government bonds. As of its most recent regulatory filing, it owned debt from Goldman Sachs
, Bank of America
and JP Morgan Chase
at the end of April. Thirty-year bonds from Freddie Mac are its largest holding.
Tipp believes corporate debt hasn’t completely recovered from the sell-off that followed Lehman Brothers’ bankruptcy, when bond prices seemed to forecast another Great Depression. The average junk bond currently pays 9 percentage points over comparable Treasurys, a spread Tipp expects to fall. Before that spread dropped below 10% in July the entire junk bond market appeared “distressed” – usually a sign of a company’s impending collapse .
While inflation fears and looming bond sales keep some from buying Treasury debt, Tipp sees value in the long 30-year bond, which currently pays 4.35%. If the recession lasts longer, such safe haven securities may start climbing again. On the other hand, if the economy rebounds and the Fed raises rates, longer-dated Treasury bonds would be the least vulnerable. He’s avoiding shorter-dated Treasurys, which could get crushed if the Fed raises rates.
