Fidelity's Bewick: Bond Funds Are in 'Goldilocks Environment'

Friday, 24 May 2013 01:07 PM

By John Morgan

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Rates may be rising, but U.S. bond funds are in a "Goldilocks environment" that could last a while longer, according to Joanna Bewick, portfolio manager of the Fidelity Strategic Asset Allocation Funds.

Fears that bonds may be on the verge of a meltdown, a recent refrain from some stock market pundits, are simply "overblown," according to Bewick.

She said the reason investors should stick with bonds is because there are no near-term catalysts that could send rates spiking skyward, Investment News reported.

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The Federal Reserve's program to buy $85 billion monthly in government debt and mortgages, along with tame economic growth and inflation, are combining to keep rates low, she said.

"We could be in this Goldilocks environment for some time," Bewick said.

Investment News reported Bewick is discounting the likelihood of a 1994 redux, when the Fed raised rates 300 basis points and caused the Barclays Capital U.S. Aggregate Bond Index to lose 2.9 percent.

"I have a hard time seeing a 1994 scenario today. Fear's overblown in the bond market. There will be headwinds, but not a disaster."

According to Morningstar, monthly inflow into intermediate-term bond funds has plummeted in recent months, while flows into bank loan funds, non-traditional bond funds and global bond funds — all of which promise protection against rising rates — have jumped sharply.

Bloomberg BusinessWeek reported that banks are reining in their debt trading, but that hedge funds are helping to fill any liquidity void.

Debt-oriented hedge funds reeled in $41.4 billion from pension plans, wealthy individuals and other investors in 2012, the most since 2007, according to data from Hedge Fund Research. And they managed a total of $639.7 billion as of March 31, eclipsing the totals held by stock-trading hedge funds.

Federal regulators recently have pushed banks to curb proprietary trading and hold more capital to back riskier investments. That's allowed hedge funds to expand in the bond business, BusinessWeek reported, and absorb some of the risk in the bond market.

"If the hedge fund firms fail, the real question is, to what degree will the market suffer from it?" asked Roy Smith, a finance professor at New York University's Stern School of Business.

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