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Gene Tannuzzo Predicts One Fed Hike in 2016 (Audio) · Bloomberg Intelligence

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  Speaker 1: You're listening to taking Stock and Pim Fox on Bloomberg
• 0:05
  Speaker 1: Radio bonds. When will the Federal Reserve raise interest rates? Well,
• 0:12
  Speaker 1: they're not going to raise them any times soon, at
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  Speaker 1: least that's according to many market watchers. Gene Tanuso is
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  Speaker 1: senior fixed income portfolio manager at Columbia thread Needle Investments,
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  Speaker 1: and he joins US now. Thanks very much for being here, Gene,
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  Speaker 1: thanks for having me. So what's your call? What exactly
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  Speaker 1: do you believe the Federal Reserve is going to do
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  Speaker 1: between now and the end of the year. Yeah, I mean,
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  Speaker 1: I think communication has certainly been a challenge when listening
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  Speaker 1: to two Fed members and trying to predict what they're
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  Speaker 1: going to do. But I think if we just listen
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  Speaker 1: to what they're saying, UM, I think they definitely want
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  Speaker 1: to hike this year. And you know, our estimate is
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  Speaker 1: that September is more convenient for them to hike than
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  Speaker 1: a December hike at this point in time. So I
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  Speaker 1: think you have a few things working for you. One,
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  Speaker 1: you know, the last couple of days, notwithstanding, UM markets
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  Speaker 1: are in a pretty accepting spot. Financial conditions UM have
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  Speaker 1: really improved since the last time they hiked equities at
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  Speaker 1: all time highs are pretty darn close to it, yields
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  Speaker 1: and spread levels pretty low, and the dollar has even
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  Speaker 1: softened a measurable amount here to date. The conditions are
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  Speaker 1: there for them to hike. The labor market, I would say,
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  Speaker 1: is generally good enough. So now we're starting to hear
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  Speaker 1: this commentary, and if you just listen to not necessarily
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  Speaker 1: what you think they ought to do, but what they're
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  Speaker 1: saying they would like to do. I think when you
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  Speaker 1: get comments from the FED chair that the case for
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  Speaker 1: rate hike has strengthened, I think that is about as
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  Speaker 1: strong of language as she could use. So I really
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  Speaker 1: do think they want to go. I think there's a
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  Speaker 1: whole question of urgency and whether or not the FED
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  Speaker 1: chair feels much more urgency this FED Vice chair stand
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  Speaker 1: Fisher does seem to think that way. Leo Brainerd FED Governor,
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  Speaker 1: who has been a devilish for some time, her too.
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  Speaker 1: She had five points about her hesitations. One when it
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  Speaker 1: comes to labor market, is there still lots of slack
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  Speaker 1: And she talked out the fact that people working part
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  Speaker 1: time because they can't fight full time jobs still at
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  Speaker 1: levels to exceed the levels of the financial crisis. She
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  Speaker 1: looked at wage data not rising very much. She also
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  Speaker 1: looked at inflation falling short of forecasts, as did Neil Cosgari,
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  Speaker 1: President Neeapolis Fit. Then it's lock Art though he's President
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  Speaker 1: Atlanta Fit. He like you would say time for a
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  Speaker 1: serious discussion of a rate hike. But I think Dennis
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  Speaker 1: has even opened the door to September. Yeah, I think
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  Speaker 1: it is on the table, And I think, you know,
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  Speaker 1: if we weren't so infatuated with the number two, we
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  Speaker 1: would look at the bevy of inflation data and say,
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  Speaker 1: you know, core inflation generally tends to be rising. It's
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  Speaker 1: in the one and a half to two and a
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  Speaker 1: half percent range, depending on which which measure you're looking at.
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  Speaker 1: Wages are also in the two to three percent growth
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  Speaker 1: range and seem to be rising. So even if core
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  Speaker 1: PC is at one point six, I think if your
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  Speaker 1: mandate is price stability, that seems relatively consistent with that.
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  Speaker 1: We seem to be very infatuated with the number two.
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  Speaker 1: But as far as I'm concerned, one point six rounds
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  Speaker 1: to two. I wonder if you could just drive how
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  Speaker 1: as a manager of the Columbia Funds Series Trust one
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  Speaker 1: and you're one of the three managers of Belieah, the
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  Speaker 1: strategic incompanients. Um, you've got obviously a lot of government
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  Speaker 1: related debt in the portfolio. What happens? How what do
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  Speaker 1: you do physically when you hear these prognostications of a
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  Speaker 1: twenty five basis point increase or I mean, is any
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  Speaker 1: of that cause you to hit the you know, sell button?
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  Speaker 1: Or what what do you do? I think you want
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  Speaker 1: to look at where interest rates are relative to expectations,
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  Speaker 1: and expectations for continued central bank easing are extraordinarily high.
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  Speaker 1: So we look across G ten markets from Europe to Japan,
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  Speaker 1: uh US, Canada, etcetera. The US is the only market
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  Speaker 1: that has even a slight positive chance of a rate
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  Speaker 1: hike priced in over the next twelve months. Um, you
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  Speaker 1: know many other markets, uh most other markets pricing in
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  Speaker 1: a pretty good probability of a cut. So that's why
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  Speaker 1: when you have something like you know, last week Mario
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  Speaker 1: drog coming in delivering nothing but dovish commentary but no
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  Speaker 1: policy change, you start to see yields back up. So
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  Speaker 1: point being expectations are extraordinarily high makes it hard for
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  Speaker 1: central banks to exceed those expectations. In a bond portfolio context,
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  Speaker 1: it's time to play it a little bit safer. It's
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  Speaker 1: time to preserve principle rain in maturities. Yes, you're giving
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  Speaker 1: up a little bit of yield, but frankly, in this environment,
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  Speaker 1: it's not that much UM. So we'd rather you concentrate
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  Speaker 1: on on a shorter duration portfolio that can preserve principle
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  Speaker 1: through a rising rate environment. Is it possible if the
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  Speaker 1: Fed raises Listen, they raise a key rate in September
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  Speaker 1: and that's it. They will be raising rates once a year.
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  Speaker 1: As a guest, Uh just recently on Bluebird Television, UH
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  Speaker 1: pointed out, Boy, that's the case. It's good. That's why
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  Speaker 1: they keep up that pace. It's going to take a
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  Speaker 1: long time to get the key rate much higher. And
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  Speaker 1: I guess it also seems to me that if if
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  Speaker 1: the guess is wrong or the bed is wrong, and
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  Speaker 1: the economy isn't that strong, we have the Institute for
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  Speaker 1: Supply Management Services M and in fact tree numbers both
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  Speaker 1: dipping pretty severely. Seems to me the Fed starting to
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  Speaker 1: raise rates could actually bullish for the long end, right,
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  Speaker 1: because if the economy slows down inflation doesn't move, then
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  Speaker 1: sooner or later you might say this is actually a
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  Speaker 1: reason to buy bonds. Yeah, And I think there are
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  Speaker 1: two important things that you look for when the Fed
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  Speaker 1: makes their policy announcement. One is do they move the
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  Speaker 1: short term rate? But two is also what are they
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  Speaker 1: doing with that longer run interest rate projection? Over the
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  Speaker 1: last four years, we've seen that come down from four
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  Speaker 1: and a quarter down to three percent. And if you
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  Speaker 1: read through all of the commentary, all of the research
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  Speaker 1: that was pointed to a Jackson hole, there's a pretty
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  Speaker 1: strong case to be made that that number that forecast
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  Speaker 1: continues to come down, and the lower that comes down,
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  Speaker 1: the more that supports the long end of the curve. Now,
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  Speaker 1: I was looking at the performance of the fund, just
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  Speaker 1: to put it into some context. You're to date, the
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  Speaker 1: fund is up the Columbia Strategic Income Fund as symbol.
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  Speaker 1: There is c O s I X. It's about seven
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  Speaker 1: and three quarters of a percent. So, okay, well done.
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  Speaker 1: How did you decide that the port folio needed Verizon bonds,
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  Speaker 1: bonds from Poland, from Brazil. You've got bonds in there
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  Speaker 1: that are Jinny May's, Plus you've got some mortgage trusts
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  Speaker 1: that are also in there. Tell me the strategy of
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  Speaker 1: what you specifically look for. Yeah, so for us that
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  Speaker 1: our strategy has a very wide mandate. So we boil
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  Speaker 1: it down to the four basic risk factors that a
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  Speaker 1: bond manager can take in the global bond market. So
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  Speaker 1: interest rate risk is one that we've been talking about
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  Speaker 1: for the last several minutes, and of course you know
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  Speaker 1: that reflects the price sensitivity of a bond to changes
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  Speaker 1: in government rates. Credit risk is another piece that I
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  Speaker 1: think is a significantly important piece for us to analyze
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  Speaker 1: that was very attractively priced earlier in the year, I
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  Speaker 1: would say now not nearly so attractively priced. And the
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  Speaker 1: other two risks I think that are very important for
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  Speaker 1: us to monitor, particularly in these markets are currency risk
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  Speaker 1: and inflation risk. Currency risk is something that has worked
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  Speaker 1: for you, meaning owning foreign currencies this year has actually
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  Speaker 1: been a pretty nice tale. And uh, inflation risk really
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  Speaker 1: is only just starting maybe to to pick up its head.
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  Speaker 1: And so you know, as we look at the portfolio,
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  Speaker 1: what's gone on this year to contribute to that return profile.
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  Speaker 1: Very early in the year, it was about taking advantage
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  Speaker 1: of more attractive risks on the credit side, so it
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  Speaker 1: was about adding to high yield securities when the implied
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  Speaker 1: default rate was greater than what we thought defaults were
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  Speaker 1: going to uh be realized at um. You know, as
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  Speaker 1: we went through the year, that was a very profitable proposition.
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  Speaker 1: Interest rates also continued to decline, So you've got both
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  Speaker 1: the credit factor and the duration factor working for you.
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  Speaker 1: That actually gives us a little bit of a queasy
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  Speaker 1: feeling because those things we we expect to have a
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  Speaker 1: diversification benefit, kind of like stocks and bonds together. Instead
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  Speaker 1: they're both going up at the same time. Gives us
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  Speaker 1: a little bit of concern. So again, it's just about
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  Speaker 1: taking risk down, not wanting too much risk in this environment,
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  Speaker 1: and more lately been skewing towards mortgage backed securities because
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  Speaker 1: as we look at the income profile of all the
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  Speaker 1: bonds we own relative to their volatility, we think there's
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  Speaker 1: a better efficiency in the mortgage market on a prospective basis, right,
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  Speaker 1: and of course explain for our listeners. And because I'm
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  Speaker 1: sure the first thing a lot of people are gonna
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  Speaker 1: say is, yeah, but if it's gonna start raising rates,
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  Speaker 1: then that's going to hit mortgage rates. How does that
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  Speaker 1: play through to MBS mortgage backed securities? We know there's
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  Speaker 1: not just duration, but there's repayment risk, there's all kinds.
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  Speaker 1: It's a complicated security to consider it certainly can be.
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  Speaker 1: I would make one, I would say important point for
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  Speaker 1: the backdrop, and that's to look at where we are
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  Speaker 1: in the credit cycle and starts to differentiate that between
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  Speaker 1: the corporate credit cycle and the household or consumer credit cycle.
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  Speaker 1: So on the corporate side, we would argue we're in
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  Speaker 1: probably the eighth, if not ninth inning of of the
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  Speaker 1: credit cycle. Um, you know, companies really aren't growing earnings organically,
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  Speaker 1: it's uh, we're seeing leverage increase, We're seeing shareholder friendly
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  Speaker 1: activity increase. Um. So things that aren't necessarily alarming right
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  Speaker 1: here right now, but ultimately do so the seeds of
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  Speaker 1: the next problem. Whereas on the household side, we've seen
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  Speaker 1: a tremendous fundamental recovery in consumer balance sheets. Um, you know,
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  Speaker 1: part of that is because of the scars of the
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  Speaker 1: financial crisis, some of that is because of regulation. But
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  Speaker 1: you mix those things together, you have consumers who are
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  Speaker 1: acting we think, pretty rationally and can withstand some of
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  Speaker 1: those bumps, probably a bit more easily than the corporate
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  Speaker 1: sector can. So just in a nutshell, then if I'm
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  Speaker 1: in bonds right now. I want to I want to
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  Speaker 1: be short duration, and I would look at something that
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  Speaker 1: has a lot of mortagspacked securities. Yeah, I think that's
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  Speaker 1: you know, for us right now, that would be our
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  Speaker 1: our preference. Um. But but I think it's not. It's
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  Speaker 1: not time to really stick your neck out there. If
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  Speaker 1: there's a strategy with a really high yield, I'd be
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  Speaker 1: pretty skeptical of of the risk that comes along with them,
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  Speaker 1: all right, Geane to do so. I think a lot
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  Speaker 1: of people are worried about risk and their skeptical and
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  Speaker 1: they're just wondering what to do. So you gave us
• 9:46
  Speaker 1: some good ideas when it comes to fixed income. In fact,
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  Speaker 1: gena senior fixed income portfolio manager at Columbia Threat Needle Investments,
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  Speaker 1: this is bloomwork.