Risk Appetite
Besides financial bonds, Eichstaedt also sees opportunities in emerging markets, whose currencies have been among the hardest hit by the rally in the dollar. Based on its holdings at the end of September, about 3.7 percent of the fund’s assets are currently invested in debt from Mexico, the most outside the U.S.
Eichstaedt anticipates peso-denominated bonds will benefit as higher interest rates in Mexico help the currency recover from its 11 percent decline this year. Central bank officials have repeatedly signaled they’ll tighten along with the Fed to preserve the nation’s interest-rate advantage and keep foreign investors from pulling out capital.
Confidence the Fed won’t upend the U.S. economy as it nudges rates higher has also pushed investors back into risk assets, said Eichstaedt, who’s “underweight” Treasuries.
Consumer Confidence
After lagging behind U.S. government bonds in the first nine months of the year, emerging market sovereign debt has gained 2.5 percent, junk-rated company bonds have advanced 1.6 percent and investment-grade corporate securities have broken even this quarter, index data compiled by Bloomberg show. Treasuries have lost about 1 percent.
Joe Higgins, who manages $3.6 billion at TIAA-CREF Investment Management in New York, says the Fed’s “data dependent” rate increases will be seen as a sign of confidence in the economy’s ability to generate jobs growth and consumer demand.
Unlike Eichstaedt, Higgins prefers to focus more on debt issued by consumer-based companies in his TIAA-CREF Social Choice Bond Fund, which has outperformed 97 percent of similar funds in the past year and 98 percent over the past three years. That’s because continued growth will pull more Americans into the labor force and fuel spending, while the increasing pool of returning workers will keep wage inflation low.
Some of his biggest consumer holdings at the end of the third quarter included debt issued by Harley-Davidson Inc. and Ford Motor Co. He also favors asset-backed securities from Domino’s Pizza Inc., which are secured by franchise royalties.
“We can’t have animal spirits and a move to the more traditional pre-crisis economy until someone, somewhere demonstrates confidence,” said Higgins, 51. “We are seeing a bit of confidence in consumer spending. We still haven’t seen it in the corporate suite.”