Bond experts agree there are still viable places for investors to park fixed-income dollars this year despite sharply narrowed credit spreads, high valuations and the start of a global pullback in monetary accommodations.

Even with the end of the business cycle just a year or two away, “we’re certainly not by any stretch of the imagination ringing the alarm bells that investors should be moving out of fixed income,” says Lisa Black, the head of taxable fixed income at Nuveen, TIAA’s investment management unit.

However, Black, who oversees Nuveen’s $280 billion in taxable fixed-income assets, and her industry peers emphasize the importance of being much more discerning this year with bonds. “Investors who do their homework or deep credit work can ferret out the winners from the losers,” she says.

Black doesn’t see much opportunity this year in Treasurys and agency securities given the low level of rates and a flatter yield curve. Nuveen projects the 10-year Treasury to yield just 2.6% to 2.75% by year’s end. She says the three areas in which the firm sees value and will continue to focus its investment activities this year, albeit selectively, are investment-grade, high-yield and emerging market debt.

In investment-grade debt, Nuveen is overweight in banking (a beneficiary of rising rates) and REITs (because of their strong covenants and cash-flow generation). The firm is slightly overweight in energy, including pipelines and integrated energy companies. One sector it’s underweight in is technology, because of the industry’s rich valuations.

In high yield, Nuveen is overweight in services (e.g., equipment rental companies, engineering and design, and home security) and chemicals, but it’s underweight in telecom, banking, and metals and mining. Black is concerned that very tight spreads aren’t compensating for credit risks. Highly leveraged companies that can’t fully deduct interest expenses because of the new tax law’s 30% cap will be worse off financially than companies that can fully deduct these expenses, she adds.

She is also focusing on wage pressures. If they heat up, it will raise inflation and, in turn, warrant sharper rate hikes. For now, the Fed expects to gradually raise the federal funds rate three times in 2018, following its three quarter-point hikes in 2017.

The “war of words” with North Korea hasn’t led to a flight to quality in fixed income, says Black, and she doesn’t expect to see any major market moves if this rhetoric continues. But if the U.S. and North Korea actually go to war—which is not Nuveen’s base case—she thinks that would impact all markets.

Unchartered Territory

First « 1 2 3 4 » Next