Some Risk May Be Needed
Thus a risk-averse investor may be forced to accept some level of risk to earn a reasonable yield from their fixed-income portfolios. We are using a few specific ETFs to help add some income, but these funds—the PIMCO 0-5 Year High Yield Corporate Bond (HYS | C-83) and the PowerShares Senior Loan Portfolio (BKLN |C)—have lost ground thus far in 2015 due to worries about credit quality and liquidity.
We think these worries are overblown: While most default risk has centered on the battered energy sector, the entire noninvestment-grade area has taken a hit.
Broadly diversified high-yield bonds could recover next year regardless of Fed actions, unless the economy slides toward recession.
Pace Of Rate Hikes Key
The Fed is clearly concerned about economic growth or it would have implemented its first rate increase since 2006 earlier this year. If we can have confidence in one forecast for 2016, it is that the pace of Fed rate hikes will be slow. The Fed doves seem to be in command, so small increases of 25 bps are in the cards, and they could easily skip raises at some meetings.
We’ve seen estimates that the Fed funds rate will still remain below 1.50% at the end of 2016. In fact, many Fed-watchers expect a “one and done” scenario, where rates sit at 0.25-0.50% unless the economy picks up steam.
If the pace of hikes is slow, the alleviation of “income anxiety” will obviously be modest in 2016.