“Like many things in fixed income, it’s really a matter of trying to run ahead of the pack and finding inefficiencies in the pricing of the marketplace,” he says.
Simply Tacking
Bob Andres, a 40-year veteran of fixed income and the chief investment officer of Andres Capital Management, a Berwyn, Pa.-based independent RIA firm launched last summer and managing approximately $700 million in assets, spent more than half of 2015 arguing there wasn’t an economic justification for Fed tightening. “I think they boxed themselves into a corner by talk, talk, talk,” he says. “We’ve had schizophrenic GDP growth for the last four years.”
Fortunately, “the bond market is not dead,” he says, “but you have to keep an eye on the factors that could cause inflation to rise,” including wage pressures and a rebound in oil and commodity prices. “If you’ve ever sailed, we’re running into a little wind here,” he says. “What we need to do is simply tack.”
Several factors are fueling his continued positive stance on bonds. “I think U.S. bonds will continue to offer a distinct yield advantage over our European friends,” he says. He sees a possible flight to quality as geopolitical events heat up. “We’re having words of war with an awful lot of people,” he says, including North Korea, Iran and Russia. Furthermore, “equities are going to get hit, in my judgment,” he says, because the stock market is overvalued.
Andres also thinks the U.S. Treasury Department will adjust its funding schedule this year, putting more weight on Treasury bills and reducing the issuance of notes and bonds in order to lower the duration of its borrowing portfolio and help reduce its overall costs.
He and his colleagues like U.S. Treasurys, particularly in the long end of the curve (10 to 30 years). They also like investment-grade corporate bonds, municipal bonds and select names in the high-yield market.
Ted Palatucci, a leader in the municipal bond industry for 40 years and a partner and portfolio manager of Andres Capital Management, suggests caution regarding bond funds and bond ETFs.
“Irrespective of the near-term direction of rates, if you are a long-term holder of a bond fund, you’re at the mercy of the market every day,” he says. “That’s not really the case with individual bonds because they’re all date-certain events.”
And when investors pull out to defend themselves in a period of rising rates, that behavior erodes the composition of a fund, he says. That’s because fund managers running out of cash and credit lines must start liquidating positions to raise sufficient money.