The bond market has seen an injection of volatility this year as Treasury yields hit multiyear highs, ushering in some pain for fixed-income investors.
Chad Morganlander, portfolio manager at Washington Crossing Advisors, is recommending moving toward high- or investment-grade bonds, rather than riskier assets. Here are his reasons.
• Fixed-income investors this year have done relatively poorly on both ends of the quality spectrum. For example, the TLT, an exchange-traded fund tracking Treasury notes with maturities of 20 years or more, has sunk 7 percent year to date. Meanwhile, the HYG, a high-yield corporate bond exchange-traded fund, is down a little over 1 percent this year.
• This downside comes as interest rates have risen, in turn depressing bond prices, and the Federal Reserve is widely expected to further hike rates this year.
• In this environment, fixed-income investors can consider "laddering" their portfolios, which means purchasing bonds with significantly different maturity levels. This is thought to decrease risk amid inflation expectations and other factors that can drive down bond prices.
• Investors should go with the highest possible quality when it comes to fixed income, shying away from high-yield assets and looking to high- or investment-grade bonds.
Bottom line: One portfolio manager recommends fixed-income investors look to high-grade bonds over high-yield in a rising rate environment.