Investors should avoid relative-value fixed-income funds for the next two years as the Federal Reserve starts scaling back unprecedented stimulus efforts that helped push borrowing costs to historic lows, according to Marathon Asset Management LP's Bruce Richards.
“Don't invest if you're an investor in any relative value fixed-income funds unless you want to lose money in the next year or two,” Richards, Marathon's co-founder and chief executive officer, said. “Eight out of 10 of those guys will lose your money, and one out of those eight will blow up.”
Since 2008, the Fed's policies have pushed investors to seek riskier assets through stimulus efforts that added more than $2.5 trillion to the financial system. Investor speculation about when the central bank will reduce the pace of bond purchases sent the yield on 10-year Treasury bonds, a benchmark for the fixed-income market, to 2.165% on May 28, the highest since it closed at 2.18% on April 5, 2012. The yield was 2.14% Tuesday.
“Whatever duration risk you have in your portfolio, you hedge out these next couple of years because of rate volatility you're likely to see,” Mr. Richards said, forecasting the yield on the 10-year won't exceed 2.5% this year. “You have to be ginger in how you invest in these markets.”
Investors should “be careful with certain highly leveraged, fixed-income relative-value strategies,” he said in a telephone interview. “Interest-rate sensitive assets,” from local currency carry trades, leveraged fixed-income exchange-traded funds, mutual funds, and financial real-estate investment trusts “have been hit pretty hard with prices down 10 to 30% for certain segments and strategies in the past month given the rate move and degree of leverage.”
These strategies are risky if Treasury yields move “substantially higher and if they move abruptly,” he said.