It is time for your clients to de-risk their bond portfolios, according to Daniel Braz, vice president and head of intermediary ETF strategy at State Street Global Advisors' SPDR ETFs.
“We are at an interesting point in the economic cycle because the longer you have a stable economy, the more risk investors take,” Braz told the advisors at a recent conference held by the New Jersey chapter of the Financial Planning Association.
“The bond portfolios I have seen recently are bull market portfolios,” Braz said. “They are loaded up on credit risk and will not protect in a down market.”
State Street Global Advisors is particularly concerned about much of the corporate debt that is being issued now,
“More of the debt being issued is lower and lower quality just above junk bond status. If you are buying investment grade corporate bond ETFs, more than 50 percent of that fund is one notch above junk. This may not end poorly, but it has the potential to do so if those corporations have to refinance that debt at higher interest rates. Many may not be able to do so,” Braz warned.
At the same time, some corporations do not raise money for the right reasons,” he added. “They may do it to buy back stocks and juice the stock price.”
“Every client is different so bond portfolios have to take those differences into account but State Street Global has built some portfolio models,” he added.
For instance, the balanced bond portfolio would have lower duration products that are more likely to go up when stocks go down. A portfolio with 30 percent treasuries, 40 percent investment grade credit and 30 percent mortgages would be a balanced one. Four-fifths of the treasuries should be short term and three-fourths of the corporate should be short term, he said.
It is true consumers also are taking on more debt right now, which could create future problems, “but we are more worried about debt on the corporate side than consumer spending,” Braz said.
“Your clients should have some long-term bonds, but it is like using garlic in cooking – they are an important piece but don’t use too much,” the executive said.