President Donald Trump’s tariff offensive and other nations’ responses to it have shaken up the bond market this year, sending yields on Treasury and muni bonds surging and widening the spread between yields on corporate bonds and Treasuries. So for this week’s Barron’s Advisor Big Q, we asked four fixed-income experts: What adjustments have you made to portfolios?
Drew Zager, private wealth advisor, Morgan Stanley Private Wealth Management: We had held a TIPS [Treasury inflation-protected securities] position, and that had done well, and now yields on short TIPS are slightly negative, and so we sold those. We think that corporates are vulnerable, given everything going on with the economy and the trade war. So we have reduced our intermediate- to longer-term corporates, and those we still own are the shorter-duration corporates. We sold out of preferreds. We think they’re probably fair value. There’s a risk that we think is inherent with the economy and with a number of the financial institutions, particularly the regional banks. We think that Treasuries are probably expensive to fair value.
But what we think is way too cheap are longer-maturity municipal bonds, either callable or not callable. Those are yielding north of 4%, tax-free. So depending on your state of residency, if you’re in the top tax bracket, the tax-equivalent yield would range between 7% and 9.15%. Municipals have cheapened up for several reasons. It’s tax season, when people tell their munis to pay their taxes. In addition, lots of people have margin calls on their stocks, and they don’t want to sell their stocks, so they sell their bonds. You’ve got extreme uncertainty with Trump. And you’ve got lots of issuance. One reason for that is that lots of municipalities want to issue all they can right now because if something were to happen to munis’ tax exemption, their costs would go up. So all that supply has caused munis to trade off, and right now they’re about the cheapest they have been since 2011.
Brian Huckstep, chief investment officer, Advyzon Investment Management: We reduced high-yield bonds toward the end of last year. We saw that credit spreads were getting tight. When prices go up for fixed-coupon bonds, yields go down. And when people are really comfortable with the market, they bid up prices for things like high-yield bonds, compressing spreads. When we saw that, we decided it was time to cut our high-yield holdings in half across our portfolios. We didn’t forecast that something like tariffs was going to be happening, that the market was going to get the shock that it got, but just by virtue of watching valuations, seeing that the market was getting a little too comfortable with risk, we acted defensively.
We pivoted into TIPS—Treasury inflation-protected securities—for inflation protection as the conversation about tariffs was starting. That has worked out for us pretty well. We’re not making a whole lot of other moves. There are so many crosscurrents right now, especially on the long end of the curve. If inflation does flare up, that’s typically bad for long term-bonds. On the other hand, when equity hits a rough patch and markets get risky, people take money out of stocks and put it into Treasury bonds, which increases prices for those bonds. The third current for long bonds is the question about what the government’s going to do as the debt balloons. Many investors are getting concerned that the U.S. government might get another credit downgrade. And if that happens, it’s bad for prices for long bonds.
Kim Olsan, senior fixed-income portfolio manager, NewSquare Capital: We invest longer-term money. We’re not looking at our fixed income as market timing in any respect. Over the past 25 years, the 10-year Treasury’s average yield is around 3.25%, and we’re currently a little more than 100 basis points above that, coming down from close to 5% over the past year or so. So historically, we would see the current market as opportunistic. On the taxable side, there has been a dislocation. Some people want to be defensive and move into money markets. So you get certain credit sectors that might pull back, like corporate bonds, and you may see some credit-spread widening. We’ve reduced corporate allocations in portfolios to some extent, bringing the overall percentage down 10% or so from where things were at the end of last year.
In our model, we invest out to about the 10-year stated maturity date, with a duration of around four years. So within that one to 10 years, we’re asking where have pockets of yield opportunity crept in, and how can we take advantage of them? So that might involve looking at categories like CDs, callable agency bonds, maybe some off-the-run govvies [Treasuries that are no longer new issues] where there isn’t typically heavy flow but we can buy them a little bit cheaper and pick up some yield that way.
Stephen Tuckwood, director of investments, Modern Wealth Management: We’ve not made any major tweaks in the midst of this market turmoil. That’s a function of how we came into the year from a fixed-income standpoint, which was short duration and high up in quality. That’s played out reasonably well, specifically given the reaction of fixed-income markets following the tariff announcement on April 2. Those few days following the announcement of tariffs there was a flight to quality, as we’ve seen historically, as Treasuries rallied for three trading days. But then something concerning did happen, where Treasuries then began to sell off. I think that was the signal to President Trump to ease off. And we obviously got the 90-day pause a few days after that.
As we think about allocating to fixed income, there are two things we’re looking for: income generation and diversification. And both of those things have come into question in different ways. We obviously went through a zero-rate environment for a long time, where the income was essentially not there but you still added some nice diversification. And then 2022 came around, where a 60/40 portfolio allocated to traditional fixed income didn’t really provide the diversification benefit at all. So we have been looking for other diversifiers and sources of return to add to the portfolio versus public equities and fixed income. We’re certainly interested in private credit. Spreads have widened a little bit, and of course, these are loans to smaller private companies, so there’s some economic exposure, but private credit has been well-behaved so far.
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