Gene Tannuzzo, the global head of fixed income at Columbia Threadneedle, said he’s got eyes on the Federal Reserve for its next moves, since he sees labor markets improving (in terms of people getting onto the payrolls) and inflation decelerating.
What’s most interesting in terms of bond investments, he said, is a “tremendous substitution, where investors have sought new safe havens with additional spread. In the fixed-income market, there’s little margin for error. We’re looking at shorter maturity and higher credit quality.”
When making these investments, the question investors have to ask themselves, he said, is how sensitive are these assets to government bond yields in a rising rate environment?
Tannuzzo said he’s finding a certain level of comfort in an unlikely place—high-yield bonds. His forecast is that default rates over the next year will be at 0.8%, down from 1.3% at the end of June, especially among companies in the energy, financial services, leisure, media, real estate and services sectors. And that’s not all. “If we look within the high yield market now, we see a tremendous amount of these companies, maybe 20%, could be upgraded to investment grade in the next 12 months,” he said.
The second quarter of 2020 saw as many downgrades as the financial crisis of 2008, but “rising stars” don’t come back in one quarter, he said, and that means there’s a door open for opportunities. “Diversified credit assets with lower duration are a better place to invest as opposed to a traditional, interest rate-sensitive portfolio.”