PLANSPONSOR - December 2018/January 2019 - 48
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Fixed income investors have several new options
T
he financial system has not only
recovered from the financial crisis
of 2008 but gained strength, which
prompted the U.S. Federal Reserve to cautiously
drain liquidity and raise its policy
interest rates throughout 2018. Bond market
yields have moved higher as well and,
given the mathematics of bond pricing,
hurt the returns of fixed income investors.
Fixed income managers have a
number of tactics to reduce the damage
to conventional portfolios. But they
face substantial challenges-a general
slowdown in global growth, a trade war
that could provide a further drag, the
peaking of a favorable credit cycle, and
the unknown effects from withdrawing
monetary stimulus-likely making 2019
another difficult year.
Rising interest rates handed fixed
income investors a setback in 2018: For
the 12 months that ended on October 31,
the Bloomberg Barclays U.S. Aggregate
index of investment-grade bonds gave up
about 2%, versus a positive return of 3.5%
for all of 2017. The comparable index for
long-term U.S. government bonds lost
6.4% for the 12 months ended October 31,
versus 8.5% to the good for 2017.
The chart (at right) plots the upward
course of interest rates over that period.
" Rates were so low for so long for a very
good reason, " observes Steve Bartolini,
co-portfolio manager of the New Income
Fund of T. Rowe Price, in Baltimore. " I am
someone who thinks the Fed has done a
very good thing with quantitative easing. "
But in the recent rise of long-term
rates, he thinks the markets have signaled
a limit: " In February, we got to 3.25% or
46 PLANSPONSOR.com December 2018 - January 2019
Art by Jon Han
3.35% in the longer end of the Treasury
market, and stocks sold off 4%. Then, in
October, we got to 3.40%, and stocks went
down 7%. The market gave us the important
feedback that those levels are enough
for the time being and that the economy
is going to have to be much stronger to
support higher yields. "
While higher rates are certain to
hurt the price of conventional bonds,
other fixed-income investments can offer
shelter. " A year ago, it wasn't all that clear
that rates were likely to rise, but finally we
came to believe it, " recalls Peter Palfrey, a
portfolio manager for the Core Plus Bond
Fund of Loomis, Sayles & Co. in Boston.
" We had the flexibility to own 'plus' sector
assets outside the Barclays Aggregate,
which are less impacted by higher
nominal interest rates, " he notes. " We
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PLANSPONSOR - December 2018/January 2019
Table of Contents for the Digital Edition of PLANSPONSOR - December 2018/January 2019
PLANSPONSOR - December 2018/January 2019 - Cover1
PLANSPONSOR - December 2018/January 2019 - Cover2
PLANSPONSOR - December 2018/January 2019 - 1
PLANSPONSOR - December 2018/January 2019 - 2
PLANSPONSOR - December 2018/January 2019 - 3
PLANSPONSOR - December 2018/January 2019 - 4
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PLANSPONSOR - December 2018/January 2019 - Cover3
PLANSPONSOR - December 2018/January 2019 - Cover4
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