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By Michael Herbst | 05-28-2009 12:07 PM

Staying a Step Ahead of Inflation

Loomis Sayles Kathleen Gaffney on tactics for hedging their portfolios against inflation and other risks facing bond investors.

Securities mentioned in this video
LSBDX Loomis Sayles Bond Instl

Michael Herbst: I know oftentimes investors sometimes view yield and income side by side, especially for income-oriented investors. At Morningstar, we get concerned sometimes when people equate the two; because it seems to me the yield measure can either hide or reveal weaknesses or problems down the line.

If you're thinking from an income perspective, looking out say over the next two to five years or so, what are some of the traps that investors should look out for, or at least some of the risks that they should be aware of when seeking an income stream from bonds?

Kathleen Gaffney: Well, it's less of an issue for the bond fund, given that it's investment grade overall. But, the high-yield market, in particular, when I look at the characteristics of that market, the average yield to maturity is in the mid-teens right now. But, if you look at how we're positioned with our credits, we're giving up yield.

And typically, we don't like to give up yield, because it's a great cushion to continue to build in the fund. But we're willing to give up yield, because I think that that number in the mid-teens is not reality, given the massive deleveraging that we're expecting and the increased default risk. So, with 25% of the high yield market in CCCs, a lot of that yield can be eroded very quickly with defaults.

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