With yields on the 10-year Treasury Note recently touching two percent for the first time since April 2012, bond investors are expressing concern. But moderately rising rates are not necessarily a bad sign, at least not for the private economy, and may be a positive for high-yield and emerging market fixed income investors, according to Fran Rodilosso, Fixed Income Portfolio Manager at Market Vectors ETFs.
“The rise in yields appears to reflect a general belief, right or wrong, that the underlying economy is strengthening, the surprise drop in fourth quarter GDP notwithstanding,” said Rodilosso. “For me, it would be more frightening should yields return to their prior low levels, a sure sign that the U.S. economy is dragging again, or as a result of a disruptive economic event in Europe, China, or elsewhere that shakes global confidence.”
Rodilosso noted that “spread product” – bonds that tend to trade in relation to 10-year Treasury yields – began reacting to the higher yield environment this week. This includes both investment grade and high-yield corporate debt. “The spreads on investment grade debt are historically tight, but I think high-yield paper may have at least a small amount of spread cushion remaining,” Rodilosso said. “Credit quality could improve in a growing economy, so the corporate debt world, which overall is far healthier than the U.S. government, still warrants investment consideration in my view.”
While Treasury yields could retreat again, the Market Vectors Portfolio Manager believes fixed income investors who have not already done so should start to consider hedging their bets as the market moves towards a more normalized “risk free” Treasury rate.
“There are various ways to adjust a fixed income portfolio – reducing interest rate duration, adding floating rate exposure or inflation-linked notes, for example,” Rodilosso said. “I am also an advocate of local currency emerging markets debt, based on stronger fundamentals of some of those countries and their currencies exhibited at the sovereign level and the fact that most of those borrowers are still paying interest rates that are not artificially low.”
Mr. Rodilosso has 20 years of experience trading and managing risk in fixed income investment strategies, including 17 years covering emerging markets. Among the Market Vectors ETFs under his watch are Fallen Angel High Yield Bond ETF (NYSE Arca: ANGL), LatAm Aggregate Bond ETF (NYSE Arca: BONO), Emerging Markets Local Currency Bond ETF (NYSE Arca: EMLC), Emerging Markets High Yield Bond ETF (NYSE Arca: HYEM), International High Yield Bond ETF (NYSE Arca: IHY), Renminbi Bond ETF (NYSE Arca: CHLC) and Investment Grade Floating Rate ETF (NYSE Arca: FLTR). As of December 31, 2012, the total assets for these ETFs amounted to approximately $1.4 billion.
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Please note that the information herein represents the opinion of the portfolio manager and these opinions may change at any time and from time to time. This is not a recommendation to buy or sell any security nor is it intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue. Non-Van Eck Global proprietary information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
About Market Vectors ETFs
Market Vectors exchange-traded products have been offered since 2006 and span many asset classes, including equities, fixed income (municipal and international bonds) and currency markets. The Market Vectors family totaled $27.6 billion in assets under management, making it the fifth largest ETP family in the U.S. and eighth largest worldwide as of December 31, 2012.
Market Vectors ETFs are sponsored by Van Eck Global. Founded in 1955, Van Eck Global was among the first U.S. money managers helping investors achieve greater diversification through global investing. Today, the firm continues this tradition by offering innovative, actively managed investment choices in hard assets, emerging markets, precious metals including gold, and other alternative asset classes. Van Eck Global has offices around the world and managed approximately $36.6 billion in investor assets as of December 31, 2012.
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