Investors for years have poured money into bonds despite the low yields, viewing them as low-risk and reliable. The trend has been so dominant that some experts have warned of a so-called "safety bubble."
But after the Federal Reserve indicated that it might be switching course in the months ahead, investors began a stampede out of bonds, with June seeing some of the highest redemptions in years.
Steve C. Huber has managed the T. Rowe Price Strategic Income Fund in Baltimore since its inception in late 2008. The fund, with about $294 million in assets at the end of May, invests in all types of bonds around the globe. Huber recently discussed the outlook for fixed income:
Investors have been bailing out of bonds — about $60 billion or so from bond funds in June alone — ever since Federal Reserve Chairman Ben Bernanke recently signaled that the Fed would begin winding down its economic stimulus efforts later this year. Have you been seeing redemptions, and what's it been like managing a bond fund lately?
Markets have been volatile, but redemptions have been modest and manageable. I like volatility because it provides opportunities. The toughest periods to invest in for me are stable periods because opportunities are usually tougher to find. Stresses in markets tend to shake things up, and markets tend to overshoot both in positive and negative directions, which can create some incredible opportunities. An example would be late 2008, when we were in the depths of the crisis and credit markets were scarred and extremely stressed. We were able to invest in those markets during what, in hindsight, was an incredible buying opportunity.
Is the bond bull market over? What can investors expect in the next year or so?
I expect that we've seen the lows in yields. The economy is improving, the unemployment rate is declining, housing markets are healing, and the Federal Reserve is getting closer to removing policy accommodation. All of these factors argue for rates higher than we've seen over the last two years. But there are still growth concerns globally, specifically in the Eurozone and pockets of emerging markets, so interest rates will not necessarily continue heading higher in a straight line. The bottom line is we're in an unprecedented period, given the quantitative easing that has taken place, which makes markets difficult to predict as policy accommodation is unwound. In this environment, staying on top of economic developments globally and adapting strategy as events unfold is critical.
The Strategic Income Fund invests in all sorts of bonds. What do you see as the best investment opportunities in the next few years?
We are in a global economy, so searching globally for opportunities can provide higher yields and better return prospects. The growth outlook longer term looks more favorable in emerging economies than it does in developed economies, and we think this provides opportunities in certain emerging-market bonds. Recently, this has been a "crowded" trade, and returns have suffered as the unwinding of positions and outflows have hurt the sector through higher credit spreads, weaker currencies and interest rates that in many cases have increased even more than U.S. rates. There are risks though. Emerging markets can be volatile and some countries are positioned better than others, so fundamental research is crucial. Another area where we see opportunity is in high-yield bonds, which tend to do well as the economy recovers even if interest rates increase. Of utmost importance in any portfolio, though, is maintaining diversification and liquidity to be able to react to changing events.
I first check overnight markets and economic data releases, trying to identify trends that may be changing in markets. I look at interest rate levels globally, currency markets and credit spreads, since information and market signals can present themselves in different ways in these markets. I also review portfolio positioning, performance, and any cash flows. But the majority of my day is spent absorbing research — relying heavily on the views generated by our global research platform, which is invaluable to my job — and also in strategy discussions. You never finish a job like this, which is what makes it interesting. Markets constantly evolve 24 hours a day. But I'm also a believer in balance, and spending time with my wife, two kids and our two dogs, as well as working out (swimming) are integrated into my daily routine. The balance not only adds enjoyment, but for me leads to clearer thinking and better insights.
Even before moving to Baltimore from Connecticut in 2006, you would come here to go to Orioles games. How did a native Pennsylvanian become an O's fan?
I grew up a huge sports fan, particularly a Pirates and Roberto Clemente fan, and loved following baseball statistics and games on the radio. When we lived in Connecticut, we would drive to Baltimore for weekend trips and take our kids to the Science Center, aquarium, Port Discovery and, of course, have some crabs. We loved Camden Yards, so we would take in a game and some Boog's barbecue. After we moved here, we started attending games more regularly and quickly transitioned to Orioles fans with a partial season-ticket plan. Around this same time, my son came home from school and said, "We live in Maryland. Why are we Steelers fans?" I certainly couldn't argue with that, so we also made the switch to the Ravens and haven't looked back since.
Steve C. Huber
Title: Manager, T. Rowe Price Strategic Income Fund