The process of raising the Federal Funds rate will be so gradual that investors should not expect a serious spike in bond yields, said James Kochan, chief fixed income strategist at Wells Fargo Funds (WFC). ‘It’s the beginning of a process that the bond market has had plenty of time to prepare for,’ said Kochan, adding that the Federal Reserve is not going to raise rates at a pace that will put the economy at risk. Kochan said investors should focus on the A/BBB segments of the investment-grade corporate market because these bonds now offer sufficient yield to withstand a gradual rise in short-term rates. He said he expects yields in this sector to rise less than Treasury yields, and the interest income they provide to be sufficient to offset modest declines in principal values. As far as the current dislocation in the high yield arena, Kochan said the trouble is isolated to the energy, mining and materials spaces. Overall, there are a lot of opportunities in high yield in his view, because some good credits are being dragged down in a broad based selloff. ‘It’s a serious problem, but it’s not a broad based problem,’ said Kochan. ‘The credit situation is okay because the economy is still growing.’
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