Financial markets should view the Federal Reserve’s latest “telegraphing” of its intent to taper bond purchases and hike interest rate hikes in 2022 with relief, according to Andy Kapyrin, partner and co-chief investment officer at $6 billion RegentAtlantic, a wealth management firm with offices in Morristown, N.J., and New York City.
Fed Chairman Jerome Powell last week told lawmakers the Fed should accelerate its plan to taper off bond purchases, while pursuing the potential for rate hikes as soon as next year.
“While the markets should view this with relief, we know the biggest place to worry going forward is in the bond market,” Kapyrin said in an interview. Advisors “will need to play defense with bonds, as inflation continues to rear its ugly head.”
This could be another tough year for the broad bond index, he said. Interest rates are going to rise and inflation will be more than a passing concern, so investors are likely to want higher yields.
Kapyrin said one asset RegentAtlantic’s investment committee is now kicking the tires on is ETFs that invest in floating rate loans—a type of bank-issued bond that has a floating interest rate, which means that when rates go up, it pays a higher rate to investors.
“Bank loans can be a way to earn a competitive yield while avoiding the risk of rising interest rates,” Kapyrin said.
The timing of investing in floating rate bank loans may soon be advantageous if the Fed starts raising interest rates in 2022, as Powell indicated they would. One bank loan ETF RegentAtlantic is evaluating is the SPDR Blackstone Senior Loan ETF (SLRN). Eaton Vance and T. Rowe Price also have good managers in the space, Kapyrin said.
“We haven’t made up our mind yet and are actively doing due diligence. What would make for a good floating rate loan product is an active management discipline. While it’s been big to be passive, the market for loans is not very liquid, which means you need a portfolio manager to construct a portfolio thoughtfully. You need someone who will understand the dynamic of the company and issuer and not just blindly buy a pool of 200 loans,” he added.
For a pure bond play, Kapyrin recommends Treasury Inflation Protected Securities (TIPS). Although the $10,000 limits make the bonds unwieldy for a wealth management firm to use, advisors can use ETFs and mutual funds, he said.
TIPS are bonds issued by the U.S. government that pay modest interest payments and come with inflation protection baked in. Each year, the U.S. Treasury adjusts the par value of TIPS based on the Consumer Price Index (CPI), which helps preserve purchasing power.