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In short: All bonds are not equal

As of 08-15-2013

Just a quick note to let investors know a rising-rate environment doesn’t translate into “Get out of bonds.’’ In fact, credit-oriented bonds, i.e., high-yield and investment-grade corporate issues, stand to benefit from the strengthening economy that’s behind the recent move up in longer yields—a move precipitated by the Fed’s acknowledgement that it may soon begin to taper monthly bond purchases precisely because it’s feeling better about the economy. As with equities, credit-oriented bonds derive a share of their value from individual corporate performance. This is why the high-yield market has been able to generate positive total returns so far in 2013 while high-quality bond benchmarks including U.S. Treasuries are well into negative territory. Longer-term Treasuries are extremely sensitive to changes in rates, making them vulnerable and a large underweight in Federated’s model stock-bond portfolios. But what’s bad for Treasuries can be good for high-yield—as Treasury yields rise, the gap (or yield spread) between high-yield bonds and comparable maturity Treasury bonds typically narrows, helping to cushion the impact of rising Treasury rates. This helps explain our recent decision to bump up the high-yield allocation in our model stock-bond portfolios to maximum overweight.

Mark E. Durbiano
Mark E. Durbiano, CFA
Senior Portfolio Manager, Head of Domestic High Yield Group, Head of Bond Sector Pod/Committee


 
 
 
 
 
 
 
 
 
 
 
Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.
Bond prices are sensitive to changes in interest rates, and a rise in interest rates can cause a decline in their prices.
Diversification and asset allocation do not assure a profit nor protect against loss.
High-yield, lower-rated securities generally entail greater market, credit/default and liquidity risk and may be more volatile than investment-grade securities. For example, their prices are more volatile, economic downturns and financial setbacks may affect their prices more negatively, and their trading market may be more limited.
Federated Investment Management Company
105183
Copyright © 2014 Federated Investors, Inc.

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