Recent corporate bond purchases that fit her risk-reward profile include Energy Transfer Partners, which builds and maintains natural gas and crude oil pipelines in 38 states. These “BBB-” bonds had a recent yield 195 basis points higher than that of comparable Treasurys. Stanek says Energy Transfer Partners’ bond payments are well-covered by its long-term contracts, and since it’s a midstream energy company, rather than a direct producer, it enjoys a buffer from commodity price fluctuations.
Baird also recently purchased bonds issued by automaker Ford carrying a “BBB” rating and maturing in three years. “We think certain short-dated auto bonds have an attractive risk-reward profile,” she says.
One place she’s not reaching for extra yield is in junk bonds, which can account for up to 20% of assets in the Baird Core Plus fund. Its peak allocation of 12.4% of assets occurred nearly a decade ago. That number stands at around 3% now, well under the benchmark’s weighting.
“Below-investment-grade bonds have seen a significant run, with investors chasing yield,” she says. “The problem is that migrating to high-yield exposure might work on the way in. But those bonds face liquidity issues during periods of market duress.”
Over many years, the fund has been overweighted to the financial sector. Stanek says that’s because access to capital is the lifeblood of banks and other financial institutions. They have an added incentive to keep their credit ratings buoyant. And the heavy price financial issuers pay for credit downgrades means their interests are very closely aligned with those of bondholders. On the other hand, the fund maintains an underweight in agency mortgage pass-through securities because she’s concerned about the valuations and potential price volatility in that sector.