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In the current environment, we see more attractive opportunities in shorter term bonds.

Apr 2018

After years of ultra-low short term interest rates, investors are now starting to benefit from the rise in interest rates – particularly for shorter maturity investments. In the current environment, we see more attractive opportunities in shorter term bonds. In many cases, where we are trimming equity positions, we are reinvesting proceeds into short-term bonds or bond funds. These investments will likely benefit over time if short-term rates continue to rise (see chart below), as we expect they will. On the other end of the spectrum, longer-term bonds maturing in 10 years or more represent increasing price risk, in our opinion. We have already seen upward pressure on longterm government bond yields, and we expect long-term rates will continue to rise gradually. We would also note the degree to which corporations have restructured their balance sheets to take advantage of the recent interest rate environment. Prior to the financial crisis, the average maturity for corporate borrowers was 8.6 years. By the end of 2017, the average had increased to 15.3 years, a meaningful extension that seeks to lock in lower rates for longer. The amount of debt outstanding at the low end of the investment grade rating scale (BBB by Standard & Poor’s agency) has also ballooned to $2.5 trillion from $686 million a decade ago. Taken together, this means the corporate bond market as a whole is more sensitive to changes in market interest rates, and to changes in credit spreads going forward. We have mitigated these risks by owning bonds with varying maturities (with an emphasis on shorter bonds), and by favoring high quality over low quality issuers in both the corporate and municipal markets.

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