The Right Bonds for a Slower-Growth Environment

Michael Herbst: And lastly, it seems, even though we are in the midst of a partial recovery in the fixed-income markets, you have commented a number of times that the rest of the recovery as it comes won't necessarily be smooth. Could you give some guidance in terms of what investors might be able to reasonably expect if they are thinking about making a fixed-income investment at this point and hoping to hold that fixed-income investment even for say the next three to five years?

Tad Rivelle: Well, I think that part of the conundrum is that likely as not, when you look back, economic growth in the U.S. and globally was driven to abnormally high levels because of the equity bubble of the late 1990s, the housing bubble of the earlier years of this decade, and we are not likely to go back to a condition that fosters such a vast amount of asset price appreciation. So the notion that we are going to go back to 3.5% or 4% real GDP growth we think is improbable. However, it is possible that you will get 4%-5% nominal GDP growth that will translate to a 4%-5% rise in national incomes.<TRANSCRIPT>

A lot of that may be inflation and only a little bit may be real, but from a bond investor's standpoint, the message really stays similar. Whether it is re-flation or inflation, Treasuries are probably too low in yield and too risky to hold, in our opinion, for the long term.

Corporate securities, high-yield, and some of the situations in residential mortgage backed securities and commercial mortgage backed securities will prosper whether we have re-flation or inflation.

Herbst: Thank you so much for sharing your insights.

Rivelle: Thank you.