Great bond investor Kathleen Gaffney says it’s been the quietest summer bond market in her 20 plus years of managing fixed income funds. Is this the proverbial calm before the storm? Have years of low interest rates lulled investors into another false sense of security? Gaffney, Portfolio Manager of the Eaton Vance Bond Fund, is concerned about risks in the bond world and has adjusted her portfolios accordingly. She’ll explain why she thinks bonds are fraught with risk and why stocks and cash are now a big part of her portfolios.
CONSUELO MACK: This week on WealthTrack, an investment world turned upside down – Eaton Vance’s great bond investor Kathleen Gaffney explains why bonds have become the riskier investment and stocks the safer one for income. Her unusual strategy for generating capital gains and income is next on Consuelo Mack WealthTrack.
Hello and welcome to this edition of WealthTrack, I’m Consuelo Mack.
For those of us living in the Northeastern United States the summer of 2014 will be remembered as one of the most beautiful in recent memory. The days have been mostly sunny and clear with little or no humidity and many nights have been cool enough to forgo air conditioning.
This nearly perfect climate has been reflected in the financial markets as well. Stock prices have gone up and the bond markets have been remarkably calm. Some would say eerily so.
This week’s guest, Great Bond Investor Kathleen Gaffney says it’s been the quietest summer bond market in her 20 plus years of experience managing bond fund.
Is this the proverbial calm before the storm? Have years of low interest rates lulled investors into another false sense of security?
There are risks out there.
The Federal Reserve has said it is winding down its unprecedented monetary easing policies of the last five years. Its massive Treasury bond buying program is ending. Expectations are that it will raise short term interest rates from their current record lows sometime next year as the economy and employment continue to improve. One key indication of how complacent bond investors are about potential market risks is illustrated by this graph which shows how the difference or spreads between yields on risky junk bonds and those on top quality U.S. Treasury bonds have fallen to the lowest levels since before the 2008 financial crisis.
In layman’s terms investors seem to be willing to pay high prices for small rewards on risky debt, providing very little cushion if the market weakens. This week’s guest is worried about risks in the bond market and has adjusted her portfolios accordingly.
She is Kathleen Gaffney, Co-Director of Investment-Grade Fixed Income at Eaton Vance and the lead Portfolio Manager of the Eaton Vance Bond Fund, which she launched in January of 2013. The fund has beaten its Morningstar multi-sector bond category and market benchmark by wide margins over the last year, putting it in the top one percent of its competitors.
Until 2012 Gaffney was Co-Portfolio Manager of the Loomis Sayles Bond Fund with legendary bond investor Dan Fuss where their team was awarded Morningstar’s Fixed Income Fund Manager of the Year.
I began the interview by asking Gaffney to explain the biggest puzzle facing bond investors today – why interest rates have remained stubbornly low.
KATHLEEN GAFFNEY: When you look around the US in particular, I see a pretty strong economy. That’s good news. Rates should be higher. But there are some technicals going on and there are weaker fundamentals around the globe that are impacting US Treasuries.