What can investors do to keep their portfolio from falling flat?
Interview: Pmicco---Executive vice president
>> welcome back. i.b.m. settled more than 50 cancer lawsuits by former employees who worked in so-called clean rooms at a plant in san jose, california. i.b.m. and the ex-employees negotiated settlements after a jury in february found the company was not liable for two workers’ canser in the first of the cases to go to trial. the terms of the settlements were not released. an interest rate hike on wall street is already baked into the cake as they say on wall street so what can investors do to keep their portfolio from falling flat as rates move higher? earlier our suzy assaad spoke with the executive vice president at pimcco and suzy asked if the bond market could rally after the fed rate decision?
>> i think the fed is different this time. they’ve prepared the markets for the rate hikes and i think that’s what’s eunick about today’s market versus previous markets . the front end actually is anticipating much higher rates. so i think we could see a mini rally, although with inflation rising the fed is likely to continue to raise rates through the next 12 months.
>> where would you see bond rates on the 10-year note at the end of this year?
>> i think the 10-year note will head up to five or 5 1/4. right now we’re at 4.7% and i think inflation will head toward 3%. historically you’ve needed 2.5% so that would suggest we’re 50 basis points, even 75 basis points away further on 10-year yields. in generally think the shortened of the yield curve is more protected right now than the long end.
>> in terms of the overall market , mark, we are looking at possibly the worst quarter since 1980. corporate bonds since 1987 from bloomberg data. where do you see value right now in the bond market ?
>> well i think the bond market you really need to look globally, so in terms of global investors, we like europe still. we think their central bank is still basically not as reflationary as say the central bank of the u.s. europe and u.k. are running more tight monetary policy. therefore their bond markets look more attractive. it’s not surprising that u.s. rates are up, say, 1.5% over the last 12 months whereas european rates are only up less than 1%. emerging markets still look attractive and for domestic investors we are favoring municipal bonds and also tips.
>> do you think there is any reason to be in corporates? do you think corporates will do any better in terms of total return?
>> well, corporate bonds are going to face several headwinds next year. we’ve been riding tailwinds and they’re about to shift to headwinds. the headwinds are going to be higher tax rates and also higher interest rates. i think that’s going to cause corporate profits to slow from a very high growth rate which should lead i believe to wider corporate bond spreads in 2005.
>> within the corporate world, are there any industries or are there any specific names that you think are particularly attractive?
>> i would focus as an investor on low leverage companies right now. the economy is very levered and companies have been levered but consumers and governments have not. therefore in terms of investing stick with high-quality companies and also stick with companies with high margins, with barriers to competition. so in other words regulatory environments such as utility sector, high margin industries such as the media and cable sector and even the gaming sector.
>> mark, we’ve been hearing from a lot of traders telling us there’s a lot of money sitting on the sidelines, a lot of people are kind of sitting on their hands. at what point do you think interest rates in this country will―where basically―how high will interest rates have to go before that money will come back again into the bond market ?
>> you know, i suspect it’ll be about three to six more months. i think basically we’ve seen interest rates go up about 1.a 5% now -- 1.5% over the last 12 months. that’s going to slow economic growth so really now we have a central bank which is going to be normalizing short rates at the same time that inflation is modestly increasing the economic growth is slowing so the fed is really doing a delicate balancing act. what i suspect will happen is that greenspan will take baby steps and that ultimately rates will back up about 50 basis points so in three months’ time we could see a buying opportunity in the bond market .
>> ok. good to know. we also are finding out, lipper released numbers about the month of may where they said basically investors redeemed $17.5 billion from the bond mutual funds in the month of may, the biggest amount in at least seven years. has pimco seen any of that?
>> we have seen some modest outflows, although we are seeing inflows in portfolios such as commodities so it’s basically a net newly erl. i think what’s important, though, is that investors are forward looking and, in fact, the fed has done a good job with their open mouth operation. so in many regards i think the market is very much prepared for the higher interest rates and that’s reflected in the mutual fund flow. mplingts the executive vice president and portfolio manager at pimco speaking with suzy assaad. hundreds of mutual fund companies will have to appoint independent chairmen. we’ll tell you about the new rule when we return.
