Bond Investing in a Rising Rate Environment
Pioneer Investment's Ken Taubes on the benefits of active management as rates rise, preparing for inflation, why high yield is still attractive today, and the relative value of stocks vs. bonds.
Ken Taubes is the executive vice president and head of U.S. portfolio management for Pioneer Investments as well as the portfolio manager of the Pioneer Strategic Income Fund (PSRAX). He recently answered our questions on the benefits of including a bond fund in one's portfolio, the attractiveness of high-yield debt, and equity portfolio management.
1. Given the prospect of rising rates in the future, is this a wise time for investors to be purchasing bond funds?
We think equities could outperform bonds in 2010, so investors should certainly include equities in their portfolios and potentially increase their equity holdings if they can withstand the volatility. Relative to bond yields, stocks are historically very attractive. But bond funds still deserve a place in a diversified portfolio. While they won't achieve the high returns they did last year, they still have the potential to add value to portfolios.
We prefer actively managed bond funds that have the flexibility to navigate through different spread sectors and identify undervalued credits as we go into a rising-rate environment. We don't see rates rising dramatically in the near term, but we expect rates to rise during at least the next few years given near-record-low real rates, an improving economic outlook, and high government-debt/gross domestic product levels. Rates won't rise in a straight line across all sectors, so managers who have the skill to take advantage of pricing disparities will have an edge over managers who are confined to specific sectors or asset classes.
2. How do you think about grappling with higher interest rates, and potentially, inflation in the future?
We recently adjusted the portfolio with a shorter duration and have begun to remove our yield curve "steepener," recognizing the near all-time-high differences between the two- to 10-year Treasuries and 10- to 30-year Treasuries. Once the market believes the Fed will raise rates, the short end of the yield curve will be under pressure.
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