Jun 11, 2015 | Post by: Roman Chuyan, CFA Comments Off on Tactical bond strategies for low-rate environment –

Tactical bond strategies for low-rate environment –

This is our tactical management update on our current view on the bond market. We at Model Capital utilize our fixed income models to help advisors who actively manage fixed income portfolios in their efforts to achieve better yield for their clients while reducing exposure to rising interest rates.

The Fed is expected to raise its short-term Fed Funds rate by 25 basis points later this year (likely in September), followed by further increases in 2016. The current consensus appears to be that 10-year yield will rise by about 0.5% in each of the next couple of years. Yields have already risen from this year’s bottom, with the 10y Treasury yield currently settled around 2.4%. Credit spread tightened somewhat so far this year after a considerably increase in the second half of 2014 (see chart). Given all this, how should advisors position their fixed income maturies and credit exposure?

1. We recommend maintaining short portfolio duration.  The 2y-10y yield curve slope continues to be very flat, at 1.51% , while we typically look for considerably higher slope as an attractive premium for extending duration.

2. Consider high-yield credit exposure. Investing a portion of fixed-income portfolios in high-yield credit often provides the desired boost to yield, if their risk can be managed effectively. HY credit markets are correlated with equities, and we base our HY risk-on/risk-off decision on our fundamentals-based model. The model’s current signal is risk-on, so we would invest in HY. As part of our tactical approach at MCM, we attempt to boost yield by managing the timing of HY exposures, and by adding exposures to unconventional markets.

This post was written on June 11, 2015; please contact us for updated views and analysis.


About Model Capital Management LLC: we are an investment firm focusing exclusively on tactical management. Please review the following pages for more information on Model Capital’s approach to tactical management and our tactical asset allocation models/strategies.

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