The team has cut by about half over the last year its allocation to high-yield debt. They’re also avoiding agency mortgage-backed securities as they anticipate low returns given tight spreads, and prefer top-rated securities with similar credit risk such as commercial MBS and collateralized loan obligations. Combined, they’re underweight government securities, which includes Treasuries and agency MBS.
Going Long
Yet given they’re long duration relative to their benchmark, they stand to benefit if yields stop rising. In their view, pensions, insurers and even individual investors will find the higher yields too good to pass up -- especially as stocks falter.
While that has yet to halt the losses in government bonds, Collins, the senior investment officer, is undeterred.
He’s “the most optimistic fixed-income guy I’ve ever met,” Peters said. The group dynamic is “low ego,” and if they’re not unanimous on a viewpoint, they’ll debate and scale it accordingly, Peters said.
That makes the conviction for persistently low Treasury yields all the more impressive.
“We’re setting up for probably better returns going forward,” said Collins, who’s been at Prudential since the 1980s. The higher benchmark yields, coupled with their strategy, means “you’re starting to look at total returns that are close to the mid-single-digits, which could very well be competitive with stocks over the next 10 years.”
This article was provided by Bloomberg News.