Fixed Income

A low-rate reality, but where to go from bonds?

No clear path out of low-yield environment: Guggenheim's Boehly

Be prepared to deal with continued low interest rates, but be careful about chasing alternatives to bonds, market watchers said Friday at Pershing LLC’s annual conference in Hollywood, Fla.
“There’s no clear path out of this [low-yield environment], so yields will respond to [news] developments,” said Todd Boehly, president of Guggenheim Investments. “We don’t see a framework for moving forward in a reasonably short period.”
One of the reasons yields are so low is the “scarcity value” of Treasuries, said Curtis Arledge, chief executive officer of BNY Mellon Investment Management.
Many institutional investors are limited to high-quality bonds and supplies of high-rated securities have diminished, he said.
Mr. Arledge expects the Federal Reserve Board’s next step will be to set a ceiling on yields, and possibly to buy foreign bonds and real assets.
Meanwhile, investors must get used to lower returns, observers said.
“With our … clients, the discussion is much wider now — we show a whole lot of scenarios, like always, but we now stress that you can’t rely on a 9% return from equities or 5% from bonds,” said Robert Leary, president of ING Insurance U.S.
Speakers at the conference warned about chasing dividend-paying stocks.
Volatility “has literally doubled over the last 10 years” in sectors such as real estate investment trusts, master limited partnerships and other income-producing stocks, said Mark Peterson, a director at BlackRock Inc.
“It’s not so much about yield scarcity as it is about higher risk in these income securities,” he said.
The challenge is to balance that risk while not giving up too much yield, Mr. Peterson added.
But Fed chairman “Ben Bernanke is going to keep interest rates so low, and make it so painful to own bonds, that someday [investors] will capitulate and buy dividend-paying stocks,” said Richard Golod, a director at Invesco Ltd.
“We’re on the cusp of a rally in megacap stocks” that offer attractive yields, he said.