Market Vectors’ Fran Rodilosso: With Tapering Set to Continue under Yellen, Investors May Look Again at Duration and Credit Risk
NEW YORK--(BUSINESS WIRE)--Federal Reserve Chair Janet Yellen’s six-hour testimony before the House Financial Services Committee earlier this week provided confirmation that the Federal Open Market Committee (FOMC) plans to continue tapering at its current pace, and that there would need to be a strong indication of change of direction in the economy for that process to stop, according to Fran Rodilosso, fixed income portfolio manager at Market Vectors ETFs.
“In an environment of uncertainty, there is value in safety”
“The once-feared tapering process is well under way and slated to continue under the new Federal Reserve Chair,” said Rodilosso.
Rodilosso observed that even while a highly accommodative U.S. monetary policy remains in place, tapering of bond purchases combined with historically low interest rates present a greater risk of rising than declining rates over the medium to long term. “Since the tapering talk began, U.S. high yield bond prices have generally held their value while Treasury yields have risen. U.S. investment grade corporates, lacking the spread cushion of high yield bonds, have not held their price levels.“
While shortening duration1 and adding credit risk worked in 2013, with the Treasury rally in January 2014, shorter duration strategies underperformed longer duration strategies, as interest rates rose and credit spreads widened. But, one month does not make a year. Credit spreads, not just in emerging markets but in developed markets as well, moved wider. So, where is there value in fixed income?
“In an environment of uncertainty, there is value in safety,” Rodilosso stated. “Keeping duration short is one important safety valve. Investment grade floating rate notes (FRNs) yield less than 1.00%2 at the moment, and coupons will only adjust higher when short rates start rising. While this may be relatively low yield in comparison to longer-term traditional fixed rate investment grade bonds, floating rate notes have less risk of capital loss from the potential of rising interest rates. Hedging high yield bonds with U.S. Treasuries has also been an effective way of limiting duration while isolating this credit risk.”
Rodilosso concluded, “Diversifying is also important. With the recent correction, emerging markets opportunities exist, and I believe that emerging markets, as well as Europe, continue to be effective options for diversification across credit, currency and geography.”
Mr. Rodilosso has over 20 years of experience trading and managing risk in fixed income investment strategies, including more than 17 years covering emerging markets. Market Vectors ETFs under his watch are Treasury-Hedged High Yield Bond ETF (NYSE Arca: THHY), Investment Grade Floating Rate ETF (NYSE Arca: FLTR®), Emerging Markets Local Currency Bond ETF (NYSE Arca: EMLC®), Emerging Markets Aggregate Bond ETF (NYSE Arca: EMAGTM), Emerging Markets High Yield Bond ETF (NYSE Arca: HYEM®), International High Yield Bond ETF (NYSE Arca: IHY®), Fallen Angel High Yield Bond ETF (NYSE Arca: ANGL®), and Renminbi Bond ETF (NYSE Arca: CHLC®). As of December 31, 2013 the total assets for these ETFs amounted to approximately $1.4 billion.
1 Duration measures a bond's sensitivity to interest rate changes that reflects the change in a bond's price given a change in yield.
2 Source: Market Vectors® US Investment Grade Floating Rate Index. Floating rate notes are less sensitive to interest rate changes, but may decline in value if their interest rates do not rise as much or as quickly as interest rates in general. Investors cannot invest directly in the Index. Yields for actual Fund investors may differ from what is shown because of differences in timing, the amount invested and fees and expenses. Current fund yields can be found at marketvectorsetfs.com.
Please note that the information herein represents the opinion of the portfolio manager and these opinions may change at any time and from time to time. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. ©2014 Van Eck Securities Corporation.
About Market Vectors ETFs
Market Vectors exchange-traded products have been offered since 2006 and span many asset classes, including equities, fixed income (municipal and international bonds) and currency markets. The Market Vectors family totaled $22.1 billion in assets under management, making it the seventh largest ETP family in the U.S. and 10th largest worldwide as of December 31, 2013.
Market Vectors ETFs are sponsored by Van Eck Global. Founded in 1955, Van Eck Global was among the first U.S. money managers helping investors achieve greater diversification through global investing. Today, the firm continues this tradition by offering innovative, actively managed investment choices in hard assets, emerging markets, precious metals including gold, and other alternative asset classes.
Investors cannot invest directly in the Index. Returns for actual Fund investors may differ from what is shown because of differences in timing, the amount invested and fees and expenses.
Market Vectors® US Investment Grade Floating Rate Index comprises U.S. dollar denominated floating rate notes issued by corporate entities or similar commercial entities that are public reporting companies in the U.S. with at least one investment grade rating.
There are risks involved with investing in ETFs, including possible loss of money. Shares are not actively managed and are subject to risks similar to those of stocks, including those regarding short selling and margin maintenance requirements. Ordinary brokerage commissions apply. Debt securities carry interest rate and credit risk. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. Credit risk is the risk of loss on an investment due to the deterioration of an issuer's financial health. The Funds' underlying securities may be subject to call risk, which may result in the Funds having to reinvest the proceeds at lower interest rates, resulting in a decline in the Funds' income.
The Funds may be subject to credit risk, interest rate risk and a greater risk of loss of income and principal than those holding higher rated securities. As the Funds may invest in securities denominated in foreign currencies and some of the income received by the Funds may be in foreign currency, changes in currency exchange rates may negatively impact the Funds’ returns. Investments in emerging markets securities are subject to elevated risks which include, among others, expropriation, confiscatory taxation, issues with repatriation of investment income, limitations of foreign ownership, political instability, armed conflict, and social instability. FLTR Fixed income securities are subject to credit risk and interest rate risk. Floating rate notes are debt issues with variable coupon payments that are pegged to a reference rate plus a spread. Coupons are reset periodically and can rise or fall with changes in the reference rate. The Fund is subject to financial services sector risk, restricted securities risk, credit risk, interest rate risk, and call risk, among others. The Fund will generally invest a significant portion of its assets in the financial services industry. As such, the Fund will be sensitive to changes in, and its performance will depend to a greater extent on, the overall condition of the financial services sector. The Fund will generally invest a portion of its assets in Rule144A securities. Rule 144A securities are restricted securities. They may be less liquid than other investments because, at times, such securities cannot be readily sold in broad public markets and the Fund might be unable to dispose of such securities promptly or at reasonable prices. A restricted security that was liquid at the time of purchase may subsequently become illiquid. The Fund may loan its securities, which may subject it to additional credit and counterparty risk. THHY is subject to risks associated with investing in high-yield securities; which include a greater risk of loss of income and principal than funds holding higher-rated securities, as well as concentration risk; credit risk; hedging risk; interest rate risk; and short sale risk. Investors should be willing to accept a high degree of volatility and the potential of significant loss. The Funds may loan their securities, which may subject them to additional credit and counterparty risk. For a more complete description of these and other risks, please refer to the Funds’ prospectus and summary prospectus.
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