Investors who hold high-yield bonds are moving their investments to those with shorter durations, based on concerns that interest rates will eventually move higher, said a BlackRock strategist.

Fund flows seen in fixed-income exchange-traded funds and other visible data show that investors are moving to shorter-dated high-yield bonds, rather than leaving the asset class all together, Karen Schenone, vice president of fixed-income portfolio solutions for Blackrock, said today at Morningstar's annual ETF conference in Chicago. “They still want that credit risk,” she said.

Lee Shaiman, managing director of The Blackstone Group and a senior portfolio manager within the customized credit strategies unit of the GSO Capital Partners division, said he’s seen a pick up in the flows to senior secured bank loans and less interest in high yield. That underscores Schenone’s comment that investors still want credit exposure.

Both Schenone and Shaiman expect interest rates to rise eventually, but not sharply. Schenone said she didn’t want to give an outright interest-rate forecast, but said fair value for interest rates -- adding gross domestic product and inflation -- is around 4.0 percent. However, she thought it was unlikely that rates would rise to that level because of political concerns related to the government shutdown and other uncertainties, so the 10-year rates may stay closer to 3 percent to 3.25 percent.

Shaiman said he expects the 10-year Treasury rate to rise to 2.80 percent by year’s end, slightly above the current yield of around 2.60 percent.

The market was surprised by the Federal Reserve’s decision not to start tapering its quantitative easing program, but given the problems in Washington, Lee said it appears that decision was a smart. “Now the Fed looks prescient, that they expected this fight on the Hill.… It appears the Fed acted wisely to not taper just as this was going on,” he said.

Schenone said the government shutdown is having an impact on credit markets in part because no data are coming out. “We’re flying blind because we’re not getting any indications on what is happening with the economy,” she said, adding that it makes it hard to value credit products.

The longer the government is shut down the greater a knock on the gross domestic product there will be, she said. That hurts companies and industries that do business with the government, such as aerospace, she added.

Shaiman said there are some knock-on effect concerns regarding the political posturing in Washington, specifically if it drags on too long and starts to affect consumer psychology. Considering that the Christmas holiday shopping season is just around the corner, there’s a chance of it hurting retail spending.

However, he doesn’t see it causing a recession, unless the shutdown goes on for a “very, very long time.”

Schenone also said she expects some deal to be reached regarding the debt ceiling, too. She doesn’t expect a default by the U.S. to happen, but she said there’s talking going around about a “delayed payment” that could happen.

The credit markets have stayed quiet overall despite the government shutdown and approaching debt ceiling, but that could change if investors get spooked or if a deal isn’t in the offing. Lee said in 2011, the last time Congress and the President were at a standstill on the debt ceiling, there was a move out of risk assets and into cash for a period of time.  If that happened again, it could hurt credit spreads, he said.

The Fed may have delayed tapering, but eventually it will start to rein in stimulus and it will be problematic, Lee said. He pointed to how poorly the credit markets acted in May and June when Fed Chairman Ben Bernanke started mentioning tapering.

“When it does happen, it’s going to be pretty devastating,” he said.