Let’s review the basics. A lot of investors evaluate fixed income sectors by looking at the level of yield they might receive for a given level of risk. We continue to explore how investors consider interest rate risk and portfolio positioning in the current environment.
Market Realist – The above graph charts the price performance of emerging market bonds, municipal bonds and three-to-seven-year Treasuries.
The Federal Reserve announced that it would be likely to complete its bond buying program, more commonly known as quantitative easing (or QE), by October 2014. This has led investors to believe that the Fed would also increase interest rates post the end of QE.
However, the Fed has indicated that the rise in rates would occur only when the economy has seen sufficient growth, making it likely that the rates would increase only in the beginning of next year.
As Russ Koesterich of BlackRock suggests, investors should exercise caution and restraint in the short to middle parts of the Treasury curves (TLT). Russ expects the market to price the Fed’s new expectations in short-term Treasuries (SHY) and three-to-seven-year Treasuries (IEF). This would mean heightened volatility in the segment, underlining the need for caution.
Ultra-short Treasuries (UST) and very-long-term Treasuries (TLT)—both of which appear on the tails of the yield curve—could prove to be more stable than short- and middle-term Treasuries. Investors could also consider tax-exempt municipal bonds and emerging market bonds (EMB) as an investment avenue instead.
Read on to the next part of this series to learn more about credit ratings and bonds.