1 00:00:01,080 --> 00:00:05,320 Speaker 1: You're listening to taking Stock and Pim Fox on Bloomberg 2 00:00:05,440 --> 00:00:12,039 Speaker 1: Radio bonds. When will the Federal Reserve raise interest rates? Well, 3 00:00:12,200 --> 00:00:14,400 Speaker 1: they're not going to raise them any times soon, at 4 00:00:14,440 --> 00:00:19,360 Speaker 1: least that's according to many market watchers. Gene Tanuso is 5 00:00:19,440 --> 00:00:24,280 Speaker 1: senior fixed income portfolio manager at Columbia thread Needle Investments, 6 00:00:24,440 --> 00:00:27,800 Speaker 1: and he joins US now. Thanks very much for being here, Gene, 7 00:00:27,880 --> 00:00:30,840 Speaker 1: thanks for having me. So what's your call? What exactly 8 00:00:30,920 --> 00:00:32,920 Speaker 1: do you believe the Federal Reserve is going to do 9 00:00:33,120 --> 00:00:35,120 Speaker 1: between now and the end of the year. Yeah, I mean, 10 00:00:35,120 --> 00:00:38,519 Speaker 1: I think communication has certainly been a challenge when listening 11 00:00:38,560 --> 00:00:40,599 Speaker 1: to two Fed members and trying to predict what they're 12 00:00:40,600 --> 00:00:42,880 Speaker 1: going to do. But I think if we just listen 13 00:00:42,920 --> 00:00:46,480 Speaker 1: to what they're saying, UM, I think they definitely want 14 00:00:46,520 --> 00:00:50,120 Speaker 1: to hike this year. And you know, our estimate is 15 00:00:50,159 --> 00:00:53,320 Speaker 1: that September is more convenient for them to hike than 16 00:00:54,440 --> 00:00:56,720 Speaker 1: a December hike at this point in time. So I 17 00:00:56,760 --> 00:00:59,280 Speaker 1: think you have a few things working for you. One, 18 00:00:59,640 --> 00:01:03,920 Speaker 1: you know, the last couple of days, notwithstanding, UM markets 19 00:01:03,920 --> 00:01:07,120 Speaker 1: are in a pretty accepting spot. Financial conditions UM have 20 00:01:07,319 --> 00:01:10,640 Speaker 1: really improved since the last time they hiked equities at 21 00:01:10,720 --> 00:01:13,399 Speaker 1: all time highs are pretty darn close to it, yields 22 00:01:13,400 --> 00:01:15,560 Speaker 1: and spread levels pretty low, and the dollar has even 23 00:01:15,600 --> 00:01:18,920 Speaker 1: softened a measurable amount here to date. The conditions are 24 00:01:18,959 --> 00:01:22,440 Speaker 1: there for them to hike. The labor market, I would say, 25 00:01:22,480 --> 00:01:24,440 Speaker 1: is generally good enough. So now we're starting to hear 26 00:01:24,440 --> 00:01:27,720 Speaker 1: this commentary, and if you just listen to not necessarily 27 00:01:27,800 --> 00:01:29,559 Speaker 1: what you think they ought to do, but what they're 28 00:01:29,600 --> 00:01:31,640 Speaker 1: saying they would like to do. I think when you 29 00:01:31,680 --> 00:01:34,600 Speaker 1: get comments from the FED chair that the case for 30 00:01:34,760 --> 00:01:36,840 Speaker 1: rate hike has strengthened, I think that is about as 31 00:01:36,840 --> 00:01:38,760 Speaker 1: strong of language as she could use. So I really 32 00:01:38,800 --> 00:01:40,200 Speaker 1: do think they want to go. I think there's a 33 00:01:40,200 --> 00:01:43,320 Speaker 1: whole question of urgency and whether or not the FED 34 00:01:43,400 --> 00:01:46,520 Speaker 1: chair feels much more urgency this FED Vice chair stand 35 00:01:46,520 --> 00:01:50,040 Speaker 1: Fisher does seem to think that way. Leo Brainerd FED Governor, 36 00:01:50,080 --> 00:01:53,040 Speaker 1: who has been a devilish for some time, her too. 37 00:01:53,240 --> 00:01:57,320 Speaker 1: She had five points about her hesitations. One when it 38 00:01:57,320 --> 00:01:59,160 Speaker 1: comes to labor market, is there still lots of slack 39 00:01:59,200 --> 00:02:01,880 Speaker 1: And she talked out the fact that people working part 40 00:02:01,920 --> 00:02:05,120 Speaker 1: time because they can't fight full time jobs still at 41 00:02:05,240 --> 00:02:08,280 Speaker 1: levels to exceed the levels of the financial crisis. She 42 00:02:08,440 --> 00:02:11,359 Speaker 1: looked at wage data not rising very much. She also 43 00:02:11,400 --> 00:02:14,359 Speaker 1: looked at inflation falling short of forecasts, as did Neil Cosgari, 44 00:02:14,400 --> 00:02:17,120 Speaker 1: President Neeapolis Fit. Then it's lock Art though he's President 45 00:02:17,160 --> 00:02:20,160 Speaker 1: Atlanta Fit. He like you would say time for a 46 00:02:20,200 --> 00:02:22,440 Speaker 1: serious discussion of a rate hike. But I think Dennis 47 00:02:22,440 --> 00:02:24,680 Speaker 1: has even opened the door to September. Yeah, I think 48 00:02:24,760 --> 00:02:26,480 Speaker 1: it is on the table, And I think, you know, 49 00:02:26,560 --> 00:02:29,960 Speaker 1: if we weren't so infatuated with the number two, we 50 00:02:30,000 --> 00:02:34,120 Speaker 1: would look at the bevy of inflation data and say, 51 00:02:34,520 --> 00:02:37,440 Speaker 1: you know, core inflation generally tends to be rising. It's 52 00:02:37,480 --> 00:02:39,000 Speaker 1: in the one and a half to two and a 53 00:02:39,040 --> 00:02:42,080 Speaker 1: half percent range, depending on which which measure you're looking at. 54 00:02:42,600 --> 00:02:45,480 Speaker 1: Wages are also in the two to three percent growth 55 00:02:45,600 --> 00:02:48,239 Speaker 1: range and seem to be rising. So even if core 56 00:02:48,280 --> 00:02:50,359 Speaker 1: PC is at one point six, I think if your 57 00:02:50,400 --> 00:02:53,640 Speaker 1: mandate is price stability, that seems relatively consistent with that. 58 00:02:53,680 --> 00:02:56,040 Speaker 1: We seem to be very infatuated with the number two. 59 00:02:56,120 --> 00:02:58,200 Speaker 1: But as far as I'm concerned, one point six rounds 60 00:02:58,200 --> 00:03:01,200 Speaker 1: to two. I wonder if you could just drive how 61 00:03:01,880 --> 00:03:05,760 Speaker 1: as a manager of the Columbia Funds Series Trust one 62 00:03:05,800 --> 00:03:07,840 Speaker 1: and you're one of the three managers of Belieah, the 63 00:03:07,840 --> 00:03:12,520 Speaker 1: strategic incompanients. Um, you've got obviously a lot of government 64 00:03:12,639 --> 00:03:17,800 Speaker 1: related debt in the portfolio. What happens? How what do 65 00:03:17,880 --> 00:03:23,959 Speaker 1: you do physically when you hear these prognostications of a 66 00:03:24,040 --> 00:03:27,040 Speaker 1: twenty five basis point increase or I mean, is any 67 00:03:27,040 --> 00:03:30,200 Speaker 1: of that cause you to hit the you know, sell button? 68 00:03:30,320 --> 00:03:32,040 Speaker 1: Or what what do you do? I think you want 69 00:03:32,080 --> 00:03:35,440 Speaker 1: to look at where interest rates are relative to expectations, 70 00:03:35,560 --> 00:03:40,839 Speaker 1: and expectations for continued central bank easing are extraordinarily high. 71 00:03:41,160 --> 00:03:44,320 Speaker 1: So we look across G ten markets from Europe to Japan, 72 00:03:44,960 --> 00:03:49,000 Speaker 1: uh US, Canada, etcetera. The US is the only market 73 00:03:49,040 --> 00:03:51,920 Speaker 1: that has even a slight positive chance of a rate 74 00:03:52,000 --> 00:03:54,760 Speaker 1: hike priced in over the next twelve months. Um, you 75 00:03:54,800 --> 00:03:58,280 Speaker 1: know many other markets, uh most other markets pricing in 76 00:03:58,480 --> 00:04:00,720 Speaker 1: a pretty good probability of a cut. So that's why 77 00:04:00,720 --> 00:04:03,800 Speaker 1: when you have something like you know, last week Mario 78 00:04:03,920 --> 00:04:07,360 Speaker 1: drog coming in delivering nothing but dovish commentary but no 79 00:04:07,440 --> 00:04:10,240 Speaker 1: policy change, you start to see yields back up. So 80 00:04:10,680 --> 00:04:14,800 Speaker 1: point being expectations are extraordinarily high makes it hard for 81 00:04:14,960 --> 00:04:18,680 Speaker 1: central banks to exceed those expectations. In a bond portfolio context, 82 00:04:18,720 --> 00:04:20,600 Speaker 1: it's time to play it a little bit safer. It's 83 00:04:20,640 --> 00:04:23,720 Speaker 1: time to preserve principle rain in maturities. Yes, you're giving 84 00:04:23,760 --> 00:04:25,799 Speaker 1: up a little bit of yield, but frankly, in this environment, 85 00:04:25,839 --> 00:04:29,160 Speaker 1: it's not that much UM. So we'd rather you concentrate 86 00:04:29,240 --> 00:04:32,039 Speaker 1: on on a shorter duration portfolio that can preserve principle 87 00:04:32,120 --> 00:04:34,600 Speaker 1: through a rising rate environment. Is it possible if the 88 00:04:34,640 --> 00:04:36,880 Speaker 1: Fed raises Listen, they raise a key rate in September 89 00:04:36,880 --> 00:04:40,479 Speaker 1: and that's it. They will be raising rates once a year. 90 00:04:41,120 --> 00:04:44,719 Speaker 1: As a guest, Uh just recently on Bluebird Television, UH 91 00:04:44,839 --> 00:04:47,120 Speaker 1: pointed out, Boy, that's the case. It's good. That's why 92 00:04:47,160 --> 00:04:48,520 Speaker 1: they keep up that pace. It's going to take a 93 00:04:48,560 --> 00:04:51,800 Speaker 1: long time to get the key rate much higher. And 94 00:04:51,839 --> 00:04:54,000 Speaker 1: I guess it also seems to me that if if 95 00:04:54,040 --> 00:04:56,080 Speaker 1: the guess is wrong or the bed is wrong, and 96 00:04:56,120 --> 00:04:58,159 Speaker 1: the economy isn't that strong, we have the Institute for 97 00:04:58,160 --> 00:05:00,760 Speaker 1: Supply Management Services M and in fact tree numbers both 98 00:05:00,800 --> 00:05:03,840 Speaker 1: dipping pretty severely. Seems to me the Fed starting to 99 00:05:03,920 --> 00:05:06,120 Speaker 1: raise rates could actually bullish for the long end, right, 100 00:05:06,200 --> 00:05:09,200 Speaker 1: because if the economy slows down inflation doesn't move, then 101 00:05:09,480 --> 00:05:12,000 Speaker 1: sooner or later you might say this is actually a 102 00:05:12,040 --> 00:05:14,280 Speaker 1: reason to buy bonds. Yeah, And I think there are 103 00:05:14,320 --> 00:05:16,520 Speaker 1: two important things that you look for when the Fed 104 00:05:16,960 --> 00:05:19,240 Speaker 1: makes their policy announcement. One is do they move the 105 00:05:19,279 --> 00:05:21,320 Speaker 1: short term rate? But two is also what are they 106 00:05:21,360 --> 00:05:24,359 Speaker 1: doing with that longer run interest rate projection? Over the 107 00:05:24,440 --> 00:05:26,680 Speaker 1: last four years, we've seen that come down from four 108 00:05:26,680 --> 00:05:28,960 Speaker 1: and a quarter down to three percent. And if you 109 00:05:29,000 --> 00:05:31,359 Speaker 1: read through all of the commentary, all of the research 110 00:05:31,440 --> 00:05:33,799 Speaker 1: that was pointed to a Jackson hole, there's a pretty 111 00:05:33,800 --> 00:05:36,480 Speaker 1: strong case to be made that that number that forecast 112 00:05:36,560 --> 00:05:39,320 Speaker 1: continues to come down, and the lower that comes down, 113 00:05:39,400 --> 00:05:42,120 Speaker 1: the more that supports the long end of the curve. Now, 114 00:05:42,120 --> 00:05:45,000 Speaker 1: I was looking at the performance of the fund, just 115 00:05:45,040 --> 00:05:47,360 Speaker 1: to put it into some context. You're to date, the 116 00:05:47,400 --> 00:05:50,560 Speaker 1: fund is up the Columbia Strategic Income Fund as symbol. 117 00:05:50,600 --> 00:05:54,640 Speaker 1: There is c O s I X. It's about seven 118 00:05:54,680 --> 00:05:57,560 Speaker 1: and three quarters of a percent. So, okay, well done. 119 00:05:58,080 --> 00:06:02,240 Speaker 1: How did you decide that the port folio needed Verizon bonds, 120 00:06:02,360 --> 00:06:06,640 Speaker 1: bonds from Poland, from Brazil. You've got bonds in there 121 00:06:06,680 --> 00:06:10,400 Speaker 1: that are Jinny May's, Plus you've got some mortgage trusts 122 00:06:10,440 --> 00:06:12,839 Speaker 1: that are also in there. Tell me the strategy of 123 00:06:12,839 --> 00:06:15,520 Speaker 1: what you specifically look for. Yeah, so for us that 124 00:06:15,760 --> 00:06:18,680 Speaker 1: our strategy has a very wide mandate. So we boil 125 00:06:18,720 --> 00:06:21,200 Speaker 1: it down to the four basic risk factors that a 126 00:06:21,240 --> 00:06:24,320 Speaker 1: bond manager can take in the global bond market. So 127 00:06:24,520 --> 00:06:26,679 Speaker 1: interest rate risk is one that we've been talking about 128 00:06:26,720 --> 00:06:28,760 Speaker 1: for the last several minutes, and of course you know 129 00:06:28,760 --> 00:06:31,920 Speaker 1: that reflects the price sensitivity of a bond to changes 130 00:06:32,000 --> 00:06:35,440 Speaker 1: in government rates. Credit risk is another piece that I 131 00:06:35,480 --> 00:06:38,160 Speaker 1: think is a significantly important piece for us to analyze 132 00:06:38,440 --> 00:06:41,560 Speaker 1: that was very attractively priced earlier in the year, I 133 00:06:41,600 --> 00:06:45,080 Speaker 1: would say now not nearly so attractively priced. And the 134 00:06:45,080 --> 00:06:47,440 Speaker 1: other two risks I think that are very important for 135 00:06:47,520 --> 00:06:50,240 Speaker 1: us to monitor, particularly in these markets are currency risk 136 00:06:50,440 --> 00:06:53,560 Speaker 1: and inflation risk. Currency risk is something that has worked 137 00:06:53,600 --> 00:06:56,680 Speaker 1: for you, meaning owning foreign currencies this year has actually 138 00:06:56,960 --> 00:06:59,960 Speaker 1: been a pretty nice tale. And uh, inflation risk really 139 00:07:00,120 --> 00:07:03,440 Speaker 1: is only just starting maybe to to pick up its head. 140 00:07:03,480 --> 00:07:05,520 Speaker 1: And so you know, as we look at the portfolio, 141 00:07:05,640 --> 00:07:08,799 Speaker 1: what's gone on this year to contribute to that return profile. 142 00:07:09,440 --> 00:07:11,640 Speaker 1: Very early in the year, it was about taking advantage 143 00:07:11,640 --> 00:07:14,120 Speaker 1: of more attractive risks on the credit side, so it 144 00:07:14,160 --> 00:07:18,040 Speaker 1: was about adding to high yield securities when the implied 145 00:07:18,080 --> 00:07:21,160 Speaker 1: default rate was greater than what we thought defaults were 146 00:07:21,200 --> 00:07:24,800 Speaker 1: going to uh be realized at um. You know, as 147 00:07:24,800 --> 00:07:28,520 Speaker 1: we went through the year, that was a very profitable proposition. 148 00:07:28,880 --> 00:07:31,760 Speaker 1: Interest rates also continued to decline, So you've got both 149 00:07:31,800 --> 00:07:35,000 Speaker 1: the credit factor and the duration factor working for you. 150 00:07:35,200 --> 00:07:37,280 Speaker 1: That actually gives us a little bit of a queasy 151 00:07:37,360 --> 00:07:39,640 Speaker 1: feeling because those things we we expect to have a 152 00:07:39,640 --> 00:07:44,040 Speaker 1: diversification benefit, kind of like stocks and bonds together. Instead 153 00:07:44,080 --> 00:07:46,240 Speaker 1: they're both going up at the same time. Gives us 154 00:07:46,240 --> 00:07:48,520 Speaker 1: a little bit of concern. So again, it's just about 155 00:07:48,600 --> 00:07:52,120 Speaker 1: taking risk down, not wanting too much risk in this environment, 156 00:07:52,360 --> 00:07:56,080 Speaker 1: and more lately been skewing towards mortgage backed securities because 157 00:07:56,240 --> 00:08:00,480 Speaker 1: as we look at the income profile of all the 158 00:08:00,520 --> 00:08:03,680 Speaker 1: bonds we own relative to their volatility, we think there's 159 00:08:04,080 --> 00:08:07,840 Speaker 1: a better efficiency in the mortgage market on a prospective basis, right, 160 00:08:08,240 --> 00:08:10,720 Speaker 1: and of course explain for our listeners. And because I'm 161 00:08:10,720 --> 00:08:12,080 Speaker 1: sure the first thing a lot of people are gonna 162 00:08:12,080 --> 00:08:13,880 Speaker 1: say is, yeah, but if it's gonna start raising rates, 163 00:08:13,920 --> 00:08:16,600 Speaker 1: then that's going to hit mortgage rates. How does that 164 00:08:16,640 --> 00:08:19,920 Speaker 1: play through to MBS mortgage backed securities? We know there's 165 00:08:19,960 --> 00:08:22,520 Speaker 1: not just duration, but there's repayment risk, there's all kinds. 166 00:08:22,560 --> 00:08:25,520 Speaker 1: It's a complicated security to consider it certainly can be. 167 00:08:25,680 --> 00:08:28,440 Speaker 1: I would make one, I would say important point for 168 00:08:28,480 --> 00:08:30,680 Speaker 1: the backdrop, and that's to look at where we are 169 00:08:30,680 --> 00:08:33,640 Speaker 1: in the credit cycle and starts to differentiate that between 170 00:08:33,760 --> 00:08:37,319 Speaker 1: the corporate credit cycle and the household or consumer credit cycle. 171 00:08:37,440 --> 00:08:40,040 Speaker 1: So on the corporate side, we would argue we're in 172 00:08:40,240 --> 00:08:42,520 Speaker 1: probably the eighth, if not ninth inning of of the 173 00:08:42,520 --> 00:08:46,760 Speaker 1: credit cycle. Um, you know, companies really aren't growing earnings organically, 174 00:08:46,760 --> 00:08:50,760 Speaker 1: it's uh, we're seeing leverage increase, We're seeing shareholder friendly 175 00:08:50,800 --> 00:08:55,640 Speaker 1: activity increase. Um. So things that aren't necessarily alarming right 176 00:08:55,640 --> 00:08:58,120 Speaker 1: here right now, but ultimately do so the seeds of 177 00:08:58,160 --> 00:09:01,480 Speaker 1: the next problem. Whereas on the household side, we've seen 178 00:09:01,480 --> 00:09:05,760 Speaker 1: a tremendous fundamental recovery in consumer balance sheets. Um, you know, 179 00:09:05,800 --> 00:09:07,559 Speaker 1: part of that is because of the scars of the 180 00:09:07,600 --> 00:09:10,680 Speaker 1: financial crisis, some of that is because of regulation. But 181 00:09:10,720 --> 00:09:13,160 Speaker 1: you mix those things together, you have consumers who are 182 00:09:13,200 --> 00:09:16,680 Speaker 1: acting we think, pretty rationally and can withstand some of 183 00:09:16,679 --> 00:09:19,480 Speaker 1: those bumps, probably a bit more easily than the corporate 184 00:09:19,480 --> 00:09:21,319 Speaker 1: sector can. So just in a nutshell, then if I'm 185 00:09:21,320 --> 00:09:23,080 Speaker 1: in bonds right now. I want to I want to 186 00:09:23,120 --> 00:09:25,520 Speaker 1: be short duration, and I would look at something that 187 00:09:25,559 --> 00:09:27,960 Speaker 1: has a lot of mortagspacked securities. Yeah, I think that's 188 00:09:28,040 --> 00:09:29,760 Speaker 1: you know, for us right now, that would be our 189 00:09:30,760 --> 00:09:33,240 Speaker 1: our preference. Um. But but I think it's not. It's 190 00:09:33,280 --> 00:09:35,480 Speaker 1: not time to really stick your neck out there. If 191 00:09:35,520 --> 00:09:37,720 Speaker 1: there's a strategy with a really high yield, I'd be 192 00:09:37,840 --> 00:09:40,440 Speaker 1: pretty skeptical of of the risk that comes along with them, 193 00:09:40,480 --> 00:09:41,960 Speaker 1: all right, Geane to do so. I think a lot 194 00:09:42,000 --> 00:09:44,360 Speaker 1: of people are worried about risk and their skeptical and 195 00:09:44,400 --> 00:09:46,080 Speaker 1: they're just wondering what to do. So you gave us 196 00:09:46,120 --> 00:09:48,240 Speaker 1: some good ideas when it comes to fixed income. In fact, 197 00:09:48,400 --> 00:09:52,920 Speaker 1: gena senior fixed income portfolio manager at Columbia Threat Needle Investments, 198 00:09:52,960 --> 00:09:53,960 Speaker 1: this is bloomwork.