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By Jeremy Glaser and Timothy Strauts | 03-13-2015 01:00 PM

Rate-Hike Fears Not Causing Investors to Shun Bonds

Money continued to flow into intermediate-term bonds in February despite concerns about a rising-rate environment, says Morningstar’s Tim Strauts.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. I'm joined today by Tim Strauts--he is the senior markets research analyst at Morningstar. We're going to look at February's asset-flows data and see what trends are emerging.

Tim, thanks for joining me.

Tim Strauts: Thanks for having me.

Glaser: Let's start in fixed income. There were inflows into that space throughout the month. Could you talk a little bit about where that money was going?

Strauts: Taxable bond was the largest-flowing category. And among taxable-bond funds, it was high-yield and intermediate-term bonds that got the most money.

Glaser: Why do you think investors were interested in high yield during the month?

Strauts: The Federal Reserve has been signaling that they may raise interest rates as soon as June, and high-yield bonds tend to do well in a rising-interest-rate environment. So, if investors are anticipating this move, they may move into the high-yield category.

Glaser: And does that seem like a prudent move to move into a high yield right now?

Strauts: Theoretically, high-yield bonds are more insulated from interest rates because of their higher coupon payments, but a lot of the high-yield bond funds have a larger exposure to oil companies. And as we know, the price of oil has dropped, so there might be a little more volatility in high-yield bond funds going forward.

Glaser: Then, how do you explain the flows into intermediate-term bonds? If we are worried about rising rates, that wouldn't seem to be a safe heaven.

Strauts: That's actually an interesting question, because I don't know why all the money is flowing into intermediate-term bonds. There may be a subset of investors that doesn't think rates are going to rise, and [in that case,] intermediate-term bonds are a good place to be. But if you think interest rates are going to rise, intermediate-term bonds are not going to be the best-performing taxable-bond category.

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