Tim Tarpening, Managing Director and Portfolio Strategist for Pacific Income Advisers, joined Keith Black, Managing Director of RIA Channel, to discuss the state of the bond market and how boutique managers can add value to advisor-client relationships.
Pacific Income Advisers is a boutique bond manager based in Southern California. With a team that has worked together for over two decades, the firm understands both the bond markets and how best to serve clients. As a boutique manager, Pacific Income Advisers has the ability to add value to each relationship through a careful understanding of investment policy statements and the unique needs of each client.
The firm invests in both investment grade and high yield bonds, with each market necessitating a unique approach. In the investment grade market, proprietary quantitative research is used to select bonds, as information regarding the prospects of each issuer is plentiful in this market. Investment grade bonds are a relatively stable market with little cyclicality or correlation to equities. High yield bonds, however, can be quite cyclical and have a higher correlation to the equity market. While information is widely available in the investment grade bond market, there can be a greater value in deep granular and fundamental research on high yield bonds, as information is not as readily available.
While most investors have heard “Don’t fight the Fed,” it seems that the market has continually done so during the current tightening cycle. Tarpening has a non-consensus view that there may be an additional rate hike or two and that easings are further away than many believe. Recent bank failures may actually be helpful to the Fed, explains Tarpening, as the rate hikes already implemented by the Fed don’t seem to have slowed the economy yet and tightening credit conditions may assist the Fed in its efforts.
Resources:
Institutional High Yield Strategies
Institutional Core Plus Strategies
The Impact of Rising Rates on Bond Markets and Asset Allocation