|
Bonds: A port in the storm
|
 |
August 28, 1998: 2:28 p.m. ET
Bond manager Swanson sees both quality and liquidity driving Treasurys
|
NEW YORK (CNNfn) -Treasury bonds have rallied as the stock market pulls back, and Doug Swanson, manager of the Pegasus Bond Fund for First Chicago NBD, says the recent historic low bond yields aren't surprising.
He attributed the renaissance of the bond market to global economic worries as well as a flight not only toward quality but toward liquidity, and cautioned investors to stay away from lower-quality securities of any sort.
A partial transcript of his "Before Hours" comments follows.
DEBORAH MARCHINI, CNNfn ANCHOR: First of all, this yield rally that we're seeing in the bond market, does the extent of it surprise you?
DOUG SWANSON, FIRST CHICAGO NBD: Not really. I mean, we've seen an environment where there's been low inflation domestically -- and foreign markets, you know -- and it's certainly been indicating that our domestic economy could be slowing at some point.
MARCHINI: You believe that it has economic significance, even though a flight to quality seems to be the chief factor behind it?
SWANSON: Well, there's no doubt. The bond market rally's been driven by two points. First, (it's been) liquidity-driven, where I think worldwide investors want high-quality securities, liquid securities, which would be Treasurys. But I think we're also seeing economic problems worldwide, and they're spreading. There's fear that the Asian flu will eventually move to our economy.
MARCHINI: We're already seeing serious deflation now in commodity prices. The Commodity Research Bureau (CRB) index of commodity prices has touched the lowest levels in some time, if not some all-time lows. What is the economic significance of that?
SWANSON: Well, that certainly shows that, you know, inflation won't be going up, and there's certainly a high probability that it could end up, you know, moving further down over the next year.
MARCHINI: Does the fact that long-term rates are lower than short-term rates now force the Fed kind of into a position where it's got to consider cutting short-term rates?
SWANSON: Well, I think the Fed's going to sit where it's at until it sees either economic numbers domestically showing that the economy is weakening or further dramatic sell-offs in the stock market. Otherwise, I think the Fed will remain on hold.
MARCHINI: Something interesting has happened in bond markets here. While the yield on Treasury securities have dropped substantially, we have not seen that happen to non-investment grade, or "junk," debt, even some investment-grade corporate debt. In some cases, we've seen those yields even rise. Is that typical of a period when we see flight to quality and/or the prospects of economic slowing?
SWANSON: Yes, it is. I think, as we said before, it is very liquidity-driven (and) there are fears that the economy is going to be weakening. That would not be the time you would want to be owning lower-quality securities.
MARCHINI: What about municipal bonds which, of course, are backed by state and local revenues and presumably are secure?
SWANSON: Well, that's an area of the market that I really am not involved in.
MARCHINI: Your sense of it -- do you have any sense of where the yield stands vis-a-vis Treasurys, and whether it's an OK investment for people at least on a yield basis?
SWANSON: I think if you buy the right quality security there, probably the yields are compelling.
MARCHINI: For the rest of us out there, what would you do with your money if you're looking for a safe port in a storm?
SWANSON: I think I would still remain in the bond market. You know, we're looking at some higher-quality non-Treasury securities -such as asset-backed and mortgage-backed securities -- so even if prepayments pick up, we'll benefit. But I think the bond market is going to have a lot less volatility relative to the stock market over the short term, so I think you still want to allocate a reasonable amount of your funds to the bond market, especially high-quality bonds.
MARCHINI: The objective here, though, being that you're not going to lose money or that you're actually going to make money?
SWANSON: I think at this point the bond market has had a pretty good rally, so the upside short term probably is not that great. But you're also not going to lose that much money, either. 
|
|
|
|
|
 |
|
