For Bond Investors, Yield Search Intensifies

Terry Flanagan

Bond investors’ challenge of obtaining reasonable real rates of return amid persistently low interest rates is a dominant theme in fixed-income markets.

Strategies to address the conundrum of finding yield in an almost-yieldless world  will be a key topic for discussion at Markets Media’s Fixed-Income Trading and Investing Summit, to be held May 14 in New York.

Many investors are disenchanted with traditional fixed-income benchmark strategies and may be looking to take a defensive posture against rising rates, according to Cutwater Asset Management Managing Director Jesse Fogarty, who will speak at the event.

Cutwater, which manages more than $29 billion, has seen a dramatic increase in institutional clients “looking for solutions and alternatives to traditional strategies,” Fogarty said.

To illustrate the unattractive fundamentals of the bond market, Fogarty noted that the Barclays U.S. Aggregate Bond Index yields less than 1.75% and has duration of more than five years, meaning that its value will decrease by more than 5% if interest rates rise by one percentage point.

“Investors are looking to reduce interest-rate risk but need to maintain yield bogeys,” or return targets,  Fogarty told Markets Media.

To help investors generate more yield, Cutwater has launched a ‘rate shield’ strategy that is meant to protect against rising rates, with duration of half of the Barclays Aggregate and a yield advantage of 150 basis points, or 1.5%.

The strategy’s multi-sector approach emphasizes floating-rate securities, including investment grade bank and finance bonds, and senior securities in the structured markets including collateralized loan obligations. The strategy allocates to higher-quality, high yield securities focusing on BB- and B-rated bonds, Fogarty said.

With negative real interest rates prevalent in the Treasury markets and strong fundamentals for many of the spread sectors of the market, many investors see interest rates as the biggest risk in the market and are comfortable taking on credit risk relative to where we are in the current economic cycle.

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