"Our view is for a low-rate environment for at least 12 to 18 months," says Payden's Moini. "The U.S. economy has slack in employment and China is slowing down. But the global economy is still growing and Europe's political leadership has shown some mettle. Greece [debt issues], maybe, were papered over, but officials look ready to prevent the spread of Spain's problems. Upcoming elections [in Greece and France, for example] do pose some uncertainty."
Against an uncertain backdrop, Payden's Moini expects a range-bound 10-year Treasury yield of 2 percent to 2.5 percent; longer-duration, higher-rated corporates around 5 percent; and higher-quality, high-yield bonds to range somewhere near 6 percent to the low 7-percent range. Bond fund investors may well remember the double-digit yields that junk bonds and funds traditionally pay. Those days are in the past, for now, putting pressure on fund managers and investors to be selective in the high-yield sector.
There is risk, but "you also collect a juicy coupon that will help cushion you from rate volatility. In a rising-rate environment, when that day does come, high-yield is less exposed," says Moini. He equates higher-quality, high-yield fund investing as "equities light." Investors might move into company-issued bonds and shares based on strong company fundamentals, but with bonds there is less volatility, he says.
As for potential areas of investment, Prudential's Collins says the fundamentals of large U.S.-based banks such as Bank of America and Goldman Sachs are healthier than they've been in decades, partially due to the post-crisis regulatory house-cleaning. Investors can't entirely dismiss potential global-market contagion backlash because of European banks' sovereign debt exposure (the ratings agencies clearly aren't ignoring this), but new demands on U.S. banks to hold more capital help offset global risks.