The wonderful thing about rising rates is that the three-month T-bill is now paying 2.18%, the highest in 10 years. That’s a real return; it’s more than what the S&P 500 dividend yield is. If investors out there are really scared, they can shorten duration as a way to protect themselves.
But we take a holistic view. We really want to manage what we feel is the biggest risk in a diversified portfolio, and that risk is not lying on the bond side.
ETF.com: How is the corporate debt sector, including investment-grade and high-yield, looking to you? Is it worth taking credit risk in this environment?
Jenkins: On the high-yield side, no. If you look at credit spreads, they’re just a little bit above 3%. It’s essentially the most compressed it's been since 2007. We don’t feel like you’re getting paid to take credit risks, at least on the high-yield side.
On the investment-grade side, it also looks expensive, but not nearly to the same degree. We have some concerns around the lower-quality end of the investment-grade side. The proportion of the investment-grade market that’s in triple B’s is dramatically higher than it’s been historically. By a lot of metrics, it’s also lower quality than it’s been historically.
Still, right now, we’re carrying a decent amount of investment-grade credit risk, whereas we dramatically reduced high-yield credit risk over the last year or so.
ETF.com: Emerging markets have been hammered across the board. Do you see any value in either local or dollar-denominated EM debt?
Jenkins: Coming into the year, it was looking pretty expensive. We had a heavy exposure in EM debt last year, but we reduced that pretty dramatically at the end of the year.
It’s getting to the point where it’s starting to look interesting, but it’s not an area of high conviction for us. We may have added a little bit of exposure there, but we haven’t made any big moves.
ETF.com: What specific ETFs do you hold in the fixed-income space?
Jenkins: We’re sort of barbelling duration a little bit for our portfolios. We like some of the ultra-short and floating-rate ETFs like the PIMCO Enhanced Short Maturity Active ETF (MINT) and the SPDR Bloomberg Barclays Investment Grade Floating Rate ETF (FLRN).
We also like high-quality duration to help offset some of the equity exposure. It could be something simple like an iShares 7-10 Year Treasury Bond ETF (IEF), some longer-duration Treasuries or TIPS.
A lot of our portfolios have been migrating toward actively managed core holdings. That gives us the ability to benefit from security selection. You have deep credit benches at some of these firms.
We’re using funds like the SPDR DoubleLine Total Return Tactical ETF (TOTL), the First Trust TCW Opportunistic Fixed Income ETF (FIXD) and the PIMCO Active Bond ETF (BOND) pretty extensively in portfolios.
ETF.com: What general piece of advice would you give fixed-income investors headed into the final quarter of the year?
Jenkins: One of the ways we try to ease people’s minds is by just reminding them that when interest rates are rising in the short term, it definitely hurts, and you can see some unrealized losses. But at the end of the day, the income you're collecting is going to be one of the big drivers of your future returns. When those yields are rising, over the long term and moving forward, that’s actually going to help your bond portfolios.
When rates were effectively at zero, you weren’t clipping much of a coupon. But as there is an orderly move toward normalization, for savers in the long term, that is a benefit. It’s not necessarily something that people should be fearing.