WEBVTT - Gene Tannuzzo Predicts One Fed Hike in 2016 (Audio) 0:00:01.080 --> 0:00:05.320 You're listening to taking Stock and Pim Fox on Bloomberg 0:00:05.440 --> 0:00:12.039 Radio bonds. When will the Federal Reserve raise interest rates? Well, 0:00:12.200 --> 0:00:14.400 they're not going to raise them any times soon, at 0:00:14.440 --> 0:00:19.360 least that's according to many market watchers. Gene Tanuso is 0:00:19.440 --> 0:00:24.280 senior fixed income portfolio manager at Columbia thread Needle Investments, 0:00:24.440 --> 0:00:27.800 and he joins US now. Thanks very much for being here, Gene, 0:00:27.880 --> 0:00:30.840 thanks for having me. So what's your call? What exactly 0:00:30.920 --> 0:00:32.920 do you believe the Federal Reserve is going to do 0:00:33.120 --> 0:00:35.120 between now and the end of the year. Yeah, I mean, 0:00:35.120 --> 0:00:38.519 I think communication has certainly been a challenge when listening 0:00:38.560 --> 0:00:40.599 to two Fed members and trying to predict what they're 0:00:40.600 --> 0:00:42.880 going to do. But I think if we just listen 0:00:42.920 --> 0:00:46.480 to what they're saying, UM, I think they definitely want 0:00:46.520 --> 0:00:50.120 to hike this year. And you know, our estimate is 0:00:50.159 --> 0:00:53.320 that September is more convenient for them to hike than 0:00:54.440 --> 0:00:56.720 a December hike at this point in time. So I 0:00:56.760 --> 0:00:59.280 think you have a few things working for you. One, 0:00:59.640 --> 0:01:03.920 you know, the last couple of days, notwithstanding, UM markets 0:01:03.920 --> 0:01:07.120 are in a pretty accepting spot. Financial conditions UM have 0:01:07.319 --> 0:01:10.640 really improved since the last time they hiked equities at 0:01:10.720 --> 0:01:13.399 all time highs are pretty darn close to it, yields 0:01:13.400 --> 0:01:15.560 and spread levels pretty low, and the dollar has even 0:01:15.600 --> 0:01:18.920 softened a measurable amount here to date. The conditions are 0:01:18.959 --> 0:01:22.440 there for them to hike. The labor market, I would say, 0:01:22.480 --> 0:01:24.440 is generally good enough. So now we're starting to hear 0:01:24.440 --> 0:01:27.720 this commentary, and if you just listen to not necessarily 0:01:27.800 --> 0:01:29.559 what you think they ought to do, but what they're 0:01:29.600 --> 0:01:31.640 saying they would like to do. I think when you 0:01:31.680 --> 0:01:34.600 get comments from the FED chair that the case for 0:01:34.760 --> 0:01:36.840 rate hike has strengthened, I think that is about as 0:01:36.840 --> 0:01:38.760 strong of language as she could use. So I really 0:01:38.800 --> 0:01:40.200 do think they want to go. I think there's a 0:01:40.200 --> 0:01:43.320 whole question of urgency and whether or not the FED 0:01:43.400 --> 0:01:46.520 chair feels much more urgency this FED Vice chair stand 0:01:46.520 --> 0:01:50.040 Fisher does seem to think that way. Leo Brainerd FED Governor, 0:01:50.080 --> 0:01:53.040 who has been a devilish for some time, her too. 0:01:53.240 --> 0:01:57.320 She had five points about her hesitations. One when it 0:01:57.320 --> 0:01:59.160 comes to labor market, is there still lots of slack 0:01:59.200 --> 0:02:01.880 And she talked out the fact that people working part 0:02:01.920 --> 0:02:05.120 time because they can't fight full time jobs still at 0:02:05.240 --> 0:02:08.280 levels to exceed the levels of the financial crisis. She 0:02:08.440 --> 0:02:11.359 looked at wage data not rising very much. She also 0:02:11.400 --> 0:02:14.359 looked at inflation falling short of forecasts, as did Neil Cosgari, 0:02:14.400 --> 0:02:17.120 President Neeapolis Fit. Then it's lock Art though he's President 0:02:17.160 --> 0:02:20.160 Atlanta Fit. He like you would say time for a 0:02:20.200 --> 0:02:22.440 serious discussion of a rate hike. But I think Dennis 0:02:22.440 --> 0:02:24.680 has even opened the door to September. Yeah, I think 0:02:24.760 --> 0:02:26.480 it is on the table, And I think, you know, 0:02:26.560 --> 0:02:29.960 if we weren't so infatuated with the number two, we 0:02:30.000 --> 0:02:34.120 would look at the bevy of inflation data and say, 0:02:34.520 --> 0:02:37.440 you know, core inflation generally tends to be rising. It's 0:02:37.480 --> 0:02:39.000 in the one and a half to two and a 0:02:39.040 --> 0:02:42.080 half percent range, depending on which which measure you're looking at. 0:02:42.600 --> 0:02:45.480 Wages are also in the two to three percent growth 0:02:45.600 --> 0:02:48.239 range and seem to be rising. So even if core 0:02:48.280 --> 0:02:50.359 PC is at one point six, I think if your 0:02:50.400 --> 0:02:53.640 mandate is price stability, that seems relatively consistent with that. 0:02:53.680 --> 0:02:56.040 We seem to be very infatuated with the number two. 0:02:56.120 --> 0:02:58.200 But as far as I'm concerned, one point six rounds 0:02:58.200 --> 0:03:01.200 to two. I wonder if you could just drive how 0:03:01.880 --> 0:03:05.760 as a manager of the Columbia Funds Series Trust one 0:03:05.800 --> 0:03:07.840 and you're one of the three managers of Belieah, the 0:03:07.840 --> 0:03:12.520 strategic incompanients. Um, you've got obviously a lot of government 0:03:12.639 --> 0:03:17.800 related debt in the portfolio. What happens? How what do 0:03:17.880 --> 0:03:23.959 you do physically when you hear these prognostications of a 0:03:24.040 --> 0:03:27.040 twenty five basis point increase or I mean, is any 0:03:27.040 --> 0:03:30.200 of that cause you to hit the you know, sell button? 0:03:30.320 --> 0:03:32.040 Or what what do you do? I think you want 0:03:32.080 --> 0:03:35.440 to look at where interest rates are relative to expectations, 0:03:35.560 --> 0:03:40.839 and expectations for continued central bank easing are extraordinarily high. 0:03:41.160 --> 0:03:44.320 So we look across G ten markets from Europe to Japan, 0:03:44.960 --> 0:03:49.000 uh US, Canada, etcetera. The US is the only market 0:03:49.040 --> 0:03:51.920 that has even a slight positive chance of a rate 0:03:52.000 --> 0:03:54.760 hike priced in over the next twelve months. Um, you 0:03:54.800 --> 0:03:58.280 know many other markets, uh most other markets pricing in 0:03:58.480 --> 0:04:00.720 a pretty good probability of a cut. So that's why 0:04:00.720 --> 0:04:03.800 when you have something like you know, last week Mario 0:04:03.920 --> 0:04:07.360 drog coming in delivering nothing but dovish commentary but no 0:04:07.440 --> 0:04:10.240 policy change, you start to see yields back up. So 0:04:10.680 --> 0:04:14.800 point being expectations are extraordinarily high makes it hard for 0:04:14.960 --> 0:04:18.680 central banks to exceed those expectations. In a bond portfolio context, 0:04:18.720 --> 0:04:20.600 it's time to play it a little bit safer. It's 0:04:20.640 --> 0:04:23.720 time to preserve principle rain in maturities. Yes, you're giving 0:04:23.760 --> 0:04:25.799 up a little bit of yield, but frankly, in this environment, 0:04:25.839 --> 0:04:29.160 it's not that much UM. So we'd rather you concentrate 0:04:29.240 --> 0:04:32.039 on on a shorter duration portfolio that can preserve principle 0:04:32.120 --> 0:04:34.600 through a rising rate environment. Is it possible if the 0:04:34.640 --> 0:04:36.880 Fed raises Listen, they raise a key rate in September 0:04:36.880 --> 0:04:40.479 and that's it. They will be raising rates once a year. 0:04:41.120 --> 0:04:44.719 As a guest, Uh just recently on Bluebird Television, UH 0:04:44.839 --> 0:04:47.120 pointed out, Boy, that's the case. It's good. That's why 0:04:47.160 --> 0:04:48.520 they keep up that pace. It's going to take a 0:04:48.560 --> 0:04:51.800 long time to get the key rate much higher. And 0:04:51.839 --> 0:04:54.000 I guess it also seems to me that if if 0:04:54.040 --> 0:04:56.080 the guess is wrong or the bed is wrong, and 0:04:56.120 --> 0:04:58.159 the economy isn't that strong, we have the Institute for 0:04:58.160 --> 0:05:00.760 Supply Management Services M and in fact tree numbers both 0:05:00.800 --> 0:05:03.840 dipping pretty severely. Seems to me the Fed starting to 0:05:03.920 --> 0:05:06.120 raise rates could actually bullish for the long end, right, 0:05:06.200 --> 0:05:09.200 because if the economy slows down inflation doesn't move, then 0:05:09.480 --> 0:05:12.000 sooner or later you might say this is actually a 0:05:12.040 --> 0:05:14.280 reason to buy bonds. Yeah, And I think there are 0:05:14.320 --> 0:05:16.520 two important things that you look for when the Fed 0:05:16.960 --> 0:05:19.240 makes their policy announcement. One is do they move the 0:05:19.279 --> 0:05:21.320 short term rate? But two is also what are they 0:05:21.360 --> 0:05:24.359 doing with that longer run interest rate projection? Over the 0:05:24.440 --> 0:05:26.680 last four years, we've seen that come down from four 0:05:26.680 --> 0:05:28.960 and a quarter down to three percent. And if you 0:05:29.000 --> 0:05:31.359 read through all of the commentary, all of the research 0:05:31.440 --> 0:05:33.799 that was pointed to a Jackson hole, there's a pretty 0:05:33.800 --> 0:05:36.480 strong case to be made that that number that forecast 0:05:36.560 --> 0:05:39.320 continues to come down, and the lower that comes down, 0:05:39.400 --> 0:05:42.120 the more that supports the long end of the curve. Now, 0:05:42.120 --> 0:05:45.000 I was looking at the performance of the fund, just 0:05:45.040 --> 0:05:47.360 to put it into some context. You're to date, the 0:05:47.400 --> 0:05:50.560 fund is up the Columbia Strategic Income Fund as symbol. 0:05:50.600 --> 0:05:54.640 There is c O s I X. It's about seven 0:05:54.680 --> 0:05:57.560 and three quarters of a percent. So, okay, well done. 0:05:58.080 --> 0:06:02.240 How did you decide that the port folio needed Verizon bonds, 0:06:02.360 --> 0:06:06.640 bonds from Poland, from Brazil. You've got bonds in there 0:06:06.680 --> 0:06:10.400 that are Jinny May's, Plus you've got some mortgage trusts 0:06:10.440 --> 0:06:12.839 that are also in there. Tell me the strategy of 0:06:12.839 --> 0:06:15.520 what you specifically look for. Yeah, so for us that 0:06:15.760 --> 0:06:18.680 our strategy has a very wide mandate. So we boil 0:06:18.720 --> 0:06:21.200 it down to the four basic risk factors that a 0:06:21.240 --> 0:06:24.320 bond manager can take in the global bond market. So 0:06:24.520 --> 0:06:26.679 interest rate risk is one that we've been talking about 0:06:26.720 --> 0:06:28.760 for the last several minutes, and of course you know 0:06:28.760 --> 0:06:31.920 that reflects the price sensitivity of a bond to changes 0:06:32.000 --> 0:06:35.440 in government rates. Credit risk is another piece that I 0:06:35.480 --> 0:06:38.160 think is a significantly important piece for us to analyze 0:06:38.440 --> 0:06:41.560 that was very attractively priced earlier in the year, I 0:06:41.600 --> 0:06:45.080 would say now not nearly so attractively priced. And the 0:06:45.080 --> 0:06:47.440 other two risks I think that are very important for 0:06:47.520 --> 0:06:50.240 us to monitor, particularly in these markets are currency risk 0:06:50.440 --> 0:06:53.560 and inflation risk. Currency risk is something that has worked 0:06:53.600 --> 0:06:56.680 for you, meaning owning foreign currencies this year has actually 0:06:56.960 --> 0:06:59.960 been a pretty nice tale. And uh, inflation risk really 0:07:00.120 --> 0:07:03.440 is only just starting maybe to to pick up its head. 0:07:03.480 --> 0:07:05.520 And so you know, as we look at the portfolio, 0:07:05.640 --> 0:07:08.799 what's gone on this year to contribute to that return profile. 0:07:09.440 --> 0:07:11.640 Very early in the year, it was about taking advantage 0:07:11.640 --> 0:07:14.120 of more attractive risks on the credit side, so it 0:07:14.160 --> 0:07:18.040 was about adding to high yield securities when the implied 0:07:18.080 --> 0:07:21.160 default rate was greater than what we thought defaults were 0:07:21.200 --> 0:07:24.800 going to uh be realized at um. You know, as 0:07:24.800 --> 0:07:28.520 we went through the year, that was a very profitable proposition. 0:07:28.880 --> 0:07:31.760 Interest rates also continued to decline, So you've got both 0:07:31.800 --> 0:07:35.000 the credit factor and the duration factor working for you. 0:07:35.200 --> 0:07:37.280 That actually gives us a little bit of a queasy 0:07:37.360 --> 0:07:39.640 feeling because those things we we expect to have a 0:07:39.640 --> 0:07:44.040 diversification benefit, kind of like stocks and bonds together. Instead 0:07:44.080 --> 0:07:46.240 they're both going up at the same time. Gives us 0:07:46.240 --> 0:07:48.520 a little bit of concern. So again, it's just about 0:07:48.600 --> 0:07:52.120 taking risk down, not wanting too much risk in this environment, 0:07:52.360 --> 0:07:56.080 and more lately been skewing towards mortgage backed securities because 0:07:56.240 --> 0:08:00.480 as we look at the income profile of all the 0:08:00.520 --> 0:08:03.680 bonds we own relative to their volatility, we think there's 0:08:04.080 --> 0:08:07.840 a better efficiency in the mortgage market on a prospective basis, right, 0:08:08.240 --> 0:08:10.720 and of course explain for our listeners. And because I'm 0:08:10.720 --> 0:08:12.080 sure the first thing a lot of people are gonna 0:08:12.080 --> 0:08:13.880 say is, yeah, but if it's gonna start raising rates, 0:08:13.920 --> 0:08:16.600 then that's going to hit mortgage rates. How does that 0:08:16.640 --> 0:08:19.920 play through to MBS mortgage backed securities? We know there's 0:08:19.960 --> 0:08:22.520 not just duration, but there's repayment risk, there's all kinds. 0:08:22.560 --> 0:08:25.520 It's a complicated security to consider it certainly can be. 0:08:25.680 --> 0:08:28.440 I would make one, I would say important point for 0:08:28.480 --> 0:08:30.680 the backdrop, and that's to look at where we are 0:08:30.680 --> 0:08:33.640 in the credit cycle and starts to differentiate that between 0:08:33.760 --> 0:08:37.319 the corporate credit cycle and the household or consumer credit cycle. 0:08:37.440 --> 0:08:40.040 So on the corporate side, we would argue we're in 0:08:40.240 --> 0:08:42.520 probably the eighth, if not ninth inning of of the 0:08:42.520 --> 0:08:46.760 credit cycle. Um, you know, companies really aren't growing earnings organically, 0:08:46.760 --> 0:08:50.760 it's uh, we're seeing leverage increase, We're seeing shareholder friendly 0:08:50.800 --> 0:08:55.640 activity increase. Um. So things that aren't necessarily alarming right 0:08:55.640 --> 0:08:58.120 here right now, but ultimately do so the seeds of 0:08:58.160 --> 0:09:01.480 the next problem. Whereas on the household side, we've seen 0:09:01.480 --> 0:09:05.760 a tremendous fundamental recovery in consumer balance sheets. Um, you know, 0:09:05.800 --> 0:09:07.559 part of that is because of the scars of the 0:09:07.600 --> 0:09:10.680 financial crisis, some of that is because of regulation. But 0:09:10.720 --> 0:09:13.160 you mix those things together, you have consumers who are 0:09:13.200 --> 0:09:16.680 acting we think, pretty rationally and can withstand some of 0:09:16.679 --> 0:09:19.480 those bumps, probably a bit more easily than the corporate 0:09:19.480 --> 0:09:21.319 sector can. So just in a nutshell, then if I'm 0:09:21.320 --> 0:09:23.080 in bonds right now. I want to I want to 0:09:23.120 --> 0:09:25.520 be short duration, and I would look at something that 0:09:25.559 --> 0:09:27.960 has a lot of mortagspacked securities. Yeah, I think that's 0:09:28.040 --> 0:09:29.760 you know, for us right now, that would be our 0:09:30.760 --> 0:09:33.240 our preference. Um. But but I think it's not. It's 0:09:33.280 --> 0:09:35.480 not time to really stick your neck out there. If 0:09:35.520 --> 0:09:37.720 there's a strategy with a really high yield, I'd be 0:09:37.840 --> 0:09:40.440 pretty skeptical of of the risk that comes along with them, 0:09:40.480 --> 0:09:41.960 all right, Geane to do so. I think a lot 0:09:42.000 --> 0:09:44.360 of people are worried about risk and their skeptical and 0:09:44.400 --> 0:09:46.080 they're just wondering what to do. So you gave us 0:09:46.120 --> 0:09:48.240 some good ideas when it comes to fixed income. In fact, 0:09:48.400 --> 0:09:52.920 gena senior fixed income portfolio manager at Columbia Threat Needle Investments, 0:09:52.960 --> 0:09:53.960 this is bloomwork.