Northern Trust Asset Management, the $1.1 trillion money manager, is betting against rates going much higher by loading up on duration in credit. The contrarian bond play involves buying higher-rated U.S. junk and investment-grade bonds, which will perform better if Treasury yields stay low.
"The most amount of credit risk you're willing to take and the most amount of duration risk you're willing to take—that's where the most positive spot is right now," Colin Robertson, head of fixed income at Northern Trust, said in an April 29 telephone interview. "That's where I'm going to get the biggest bang for my buck."
Other major bond buyers like JPMorgan Asset Management and BlackRock Inc. have shied away from high-duration assets—which were slammed in March when rates jumped—amid concerns that global growth will fuel inflation and push benchmark yields up. As rates stabilized in April, high-duration bonds rallied, pulling some investors back in. However, many market participants still expect rates to go higher, which would knock the debt again.
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Chicago-based Robertson takes an opposing view on duration, which measures the sensitivity of a bond's price to interest rate changes. He expects yields on 10-year Treasuries to stay in a 1.25 percent to 1.75 percent range for the rest of this year.
"It's extremely hard for me to see a big shift in the fixed-income markets anytime soon, and investors are being too aggressive with respect to inflation expectations," said Robertson. "Short-term rates are going to stay lower for longer than investors think."
Northern Trust doesn't expect credit spreads to tighten much more, having already hit multiyear tights this year, but he says the chance of them spiking is slim. Besides seeing value in BB-rated bonds, Northern Trust expects CCC-rated debt to perform well and prefers high-yield bonds over leveraged loans on a long-term basis.
Robertson expects issuance to slow as "so many companies have done what they wanted to do." He adds that there's more cash in money-market funds now that needs to be invested than there was before the pandemic. "The supply/demand dynamics are still fully in play, even in the face of an absolutely incredible amount of high-yield issuance," said Robertson.
Accommodative monetary policy, diminished default risk, and a benign maturity schedule boost the case for junk credit. Robertson doesn't expect the Federal Reserve to start thinking about tapering until July at the earliest.
"The Fed has now shown too many times that they will be there to support," Robertson said. "They could taper bond purchases, and they would still be in a position where interest rates should stay anchored at zero on the short end."
The big risk to Robertson's call is that the Fed interprets volatile macroeconomic data in a different way than he expects. Nonetheless, he has high conviction in his risk-on credit call. "Not being fully invested would be the biggest mistake," said Robertson, referring to credit markets overall.
—With assistance from Gowri Gurumurthy.
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