Michael Kastner, Halyard Asset Management, and Kathleen Gaffney, Eaton Vanceshares, share their take on bonds and interest rates following Doubleline Jeff Gundlach saying it’s time to be defensive on bonds.
Is it time to be defensive on bonds?
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“The bond market still thinks the Fed is bluffing,’’ said Michael Kastner, managing principal at Halyard Asset Management.
“Rates are way too low and investors have made a mistake in thinking the Fed would tighten policy at the end of this year or in 2016,” said Michael Kastner, managing principal at Halyard Asset Management. “We are going to see investors sell short-dated bond holdings and interest rates will move higher as they come round to the view that the Fed may tighten policy a lot sooner than many thought.”
“Volatility always increases at the start of the year, but this time, we are really seeing people buying into the US bond market on the assumption benchmark rates will stay very low until at least 2016,” said Michael Kastner, a managing principal at Halyard Asset Management.
Mr Kastner said such “aggressive” bond buying was “risky”.
“There’s a false sense of security out there among many investors regarding the Fed’s next moves,” he said. “Look at how low Treasury yields are right now, which means there’s not a lot of protection when rates start to rise again.”
Michael Kastner, principal at Halyard Asset Management, says the benefits of cheaper oil prices will more than offset a shakeout for the energy industry.
“We still expect the Fed will raise rates and we could be at 1 per cent by the end of the year,” says Mr Kastner.
“The junk bond market is having a hard time and the pressure will continue,” said Michael Kastner, managing principal at Halyard Asset Management. “There are no real buyers right now and mutual funds will keep seeing redemptions.”
Michael Kastner, managing principal at Halyard Asset Management, said a further fall in the oil price raises the prospect of more underperformance of junk-rated debt, to the detriment of the broader market.
“In fixed income, once you can no longer quantify risk versus return, you head for the exit,” said Mr Kastner. With junk rated debt paying a coupon of 4-6 per cent, he said there was not enough protection against rising losses.
“Bankers want to push deals and issuers are looking to take advantage of lower yields,” said Michael Kastner, managing principal at Halyard Asset Management. He expected a flurry of deals before the middle of December, though investors had become more discerning about credit risk, he said.
“Corporate deals are not getting done as easily as they were a couple of months ago. Investors are a little more selective on credit at the moment.”