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By Jeremy Glaser and Sarah Bush | 05-09-2013 01:00 PM

Head-On Approaches to Fixed Income

As investors debate the challenges of interest-rate and credit risks, they should also understand the role bonds play in their portfolios, says Morningstar's Sarah Bush.

Jeremy Glaser: For Morningstar, I’m Jeremy Glaser. We are getting ready for the 25th anniversary of the Morningstar Investment Conference, and certainly fixed income will be one of the hot topics. I'm here with Sarah Bush, a senior mutual fund analyst, to look at what she thinks will be the key themes in the bond area.

Sarah, thanks for joining me.

Sarah Bush: Thanks very much. I'm happy to be here.

Glaser: We’re still in the midst of an incredible bull run for fixed-income investors over really the entire history of this conference, but now that yields are so incredibly low with the 10-year Treasury rate below 2%, are there any opportunities left? What kind of challenges do investors face right now?

Bush: That's a very interesting question. I actually went back and looked and was trying to guess how high the 10-year Treasury was when we started doing these conferences. If you look back 25 years, the 10-year Treasury was actually a little bit above 8%. So, that's a very different environment. I covered Dan Fuss at Loomis Sayles, and he says that in his early career, all you had to do was get long and stay long, and that was the secret to success. So, we are at a very different place.

So, we actually have our main general session panel on bonds. We have three very experienced fixed-income investors, who will be helping us think about that question, and certainly one of the approaches people have taken is to look beyond the traditional investment-grade U.S.-focused bond market.

So, we are going to be joined by Tad Rivelle at TCW. We will also be joined by Curtis Mewbourne at PIMCO, and Steve Smith at Brandywine Funds, and each one of those firms has taken a slightly different approach. So, one thing that we can certainly look at and we'll talk a lot about is what opportunities are there in the global fixed-income markets. So, we're looking at developed markets and developing markets, and obviously, with everything that's happened with the European credit crisis, we're thinking a little bit differently about risk in that arena. So, we'll certainly touch on that.

Another question that comes up for a lot of investors is what kind of a role should currency play in their bond portfolios. Is it too volatile? What should they be looking at? What kind of risk controls are in place? And this is something we certainly are seeing more bond managers make more use of, so that's something we'll certainly be thinking about.

And then a third area is obviously just looking at a broader opportunity set even within the U.S., and TCW has obviously been very active in the nonagency mortgage market. So, that's an area we can expect to hear some thoughts on.

And then finally, this will be an opportunity to ask these very experienced investors the big question. How long do they expect interest rates to stay low, and at what point should investors be thinking about repositioning their portfolios?

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