The bottom rungs of the high yield bond market are too pricey after the run-up since February, but the higher quality issues are still worth buying and holding, said Joseph Higgins, portfolio manager for the TIAA-CREF Bond fund . “The higher quality high yield is not overpriced because the recession is still a ways off, certainly two or three years away, and financing is cheap, so there remains some value there,” said Higgins. The TIAA-CREF Bond fund is up 6.1% thus far in 2016, according to Morningstar. The $3.3 billion fund has returned an average of 4.3% annually over the past three years, outpacing 87% percent of its rivals in Morningstar’s intermediate-term bond category. The trailing 12 month yield for the fund is 2.4%, according to Morningstar. Higgins believes that interest rates will stay “lower for longer”, even going so far as to suggest Fed Chief Janet Yellen may throw in the towel with rate increases this year. Until the market sees three to six months of wages increases, the “lower for longer” projection will be his outlook. Many categories such as below-investment grade emerging markets bonds, both sovereign and corporate, have rallied extensively, and future gains may rely on pricing to perfection, according to Higgins. Higgins said he is leaning toward quality in these sectors and is taking a cautious approach going forward. He said newer frontier markets in Africa and the Caribbean trade more thinly, have the highest yields and may offer long-term value. Asset backed securities are trading very richly, in Higgins opinion, so he is focusing on the highest quality securities in the auto and credit card space. Bank Loans, on the other hand, have proven to be incredibly resilient and he predicts that there are many innings left in the economy recovery cycle and this category. Higgins also sees municipal bonds as a “rich asset class”, yet he still likes them because of their quality. He selects general obligation bonds based on the individual characteristics of the particular community rather than macroeconomic trends. And on the revenue side he favors power plant Securities, health complexes and water irrigation bonds.
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