Craig Elder, Senior Fixed Income Research Analyst at Baird, recently shared his recommendations for minimizing risk while adding value in a market fraught with uncertainty over interest rates with The Bond Buyer. In the article, “Credit, Curve Selection Proves Valuable,” Elder discusses the prospect of rising interest rates and his preference for a so-called barbell strategy. Following is an excerpt:
"[Rising interest rates have] been anticipated for so long, I don't know if it has any effect at all on the long end of the curve," [Craig] Elder, senior vice president and fixed income strategist at the Milwaukee-based asset manager, said of the expectation for rising interest rates.
While he thinks there is a likelihood of the Federal Reserve raising rates sometime between June and September, Elder said he isn't preoccupied with that outcome when recommending strategies for the private wealth management business, which oversees more than $109 billion in client assets for high net worth individuals and institutions as of Dec. 31.
In 2013, Baird ranked 23rd on Barron's Top 40 wealth managers in the United States, and has been consistently on the list since 2007.
In the meantime, Elder said the firm is finding value by focusing its exposure on the ultra-short and intermediate sectors of the municipal yield curve.
He said it uses a barbell approach - investing in securities in the one to five-year maturity range and between 15 and 20 years. The strategy allows the firm to be defensive and hedge against short-term volatility while also providing money for reinvestment if rates do rise.
"In the 15- to 20-year range, you have to go out that far to get yield," but many investors are reluctant to invest beyond that where the yield curve is flat, he said. "If I'm going to pick up 13 basis points of yield to go out from 20 to 30 years I would just as well stay at 20 years." On Friday, bonds maturing in 2030 on the triple-A general obligation scale were yielding 2.27%, while the 20-year paper was yielding 2.49%, Elder noted.
"If it were steep from 20 to 30 years, it might get my attention," he said.
While he said the intermediate yields are "nothing to write home about," the attractive relative value of municipals versus Treasuries justifies ownership. …
At Baird, Elder said solid revenue bonds, such as water and sewer debt, select health care credits, as well as local high-quality school or infrastructure bonds are generating value, minimizing risk, and building a comfort zone among clients.
"People tend to be more comfortable with schools they drive by, or hospitals if they are familiar with it," Elder said. "It's a simplistic view but it works with investors."
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Municipal bonds may not be suitable for all investors, especially for those in lower tax brackets. Past performance is not a guarantee of future results. The strategies noted above are general in nature; investors must consider their specific circumstances prior to implementing any strategies.