| NEW YORK, March 23
NEW YORK, March 23 Investors worried the Federal
Reserve will start raising interest rates in a year's time or
even sooner should stick with shorter-maturity bonds,
high-quality corporate debt and stocks with attractive dividends
These defensive-oriented securities should offer a cushion
against any sudden declines in the broader stock and bond
markets while providing steady income at a time when the Fed is
edging toward the end of its ultra-low-interest rate policy,
analysts and portfolio managers said.
"Many people are still hunting for yields when they should
be hunting for safety," said Carl Kaufman, a portfolio manager
at Osterweis Capital Management in San Francisco. "I would just
No one expects the Fed to lift rates in the near term.
Still, comments this week from Janet Yellen, who just took over
as Fed chair, caught many in the market off guard when she
suggested the central bank may be in a position to raise its key
interest rate as soon as six months after ending its massive
That could put the first rate hike on the table by the
spring of 2015 compared with previous expectations for no sooner
than the second half of the year. Indeed, rate futures markets
now assign a 52 percent probability to the Fed's April 2015
meeting for the first rate hike versus just a 33 percent chance
a month ago.
To be sure, the economy continues to grow at a subpar rate,
which could help keep bond yields near their historic lows.
Tensions between Russia and the West over Ukraine and
uncertainty about the health of the Chinese economy could hurt
U.S. and global growth and prompt the Fed to keep interest rates
low for longer.
STICK WITH SHORT-DATED BONDS
But those who would rather not deal with the risk of an
earlier move by the Fed should reduce their holdings of
longer-dated bonds in an effort to trim their "duration" risk so
they could avert losses if interest rates rise further. Bond
yields and prices move in opposite directions.
Meanwhile, top-rated corporate bonds will continue to
provide some income while featuring lower price volatility than
lower-rated junk bonds and bank loans, which have enjoyed big
demand throughout the era of the Fed's financial crisis-driven
Heather Loomis, West Coast director at J.P. Morgan Private
Bank in San Francisco, said long-dated Treasuries, municipal
bonds and securities from agencies like Fannie Mae are
especially vulnerable to another surge in yields. "Reduce
duration so you are less sensitive to the upward rise in
yields," she said.
She said the average duration of her portfolios is about 2.5
years, half of most widely followed U.S. bond indexes.
Exchange-traded funds focused on shorter duration bonds and
those with defined maturity are alternative vehicles that
mitigate concerns about rising rates, said Matt Tucker, iShares
head of fixed-income strategy at BlackRock in San Francisco.
"The strongest trend we're seeing now is the move into short
maturity fixed income," Tucker said, like the iShares Short
Maturity Bond ETF, which includes a range of U.S.
dollar-denominated short-term bonds, primarily investment grade,
with an average duration of one year or less. [ID: nL2N0HK2AK]
The fund, with about $210 million in assets, has had inflows of
about $35 million so far this year, according to Lipper data.
Steve Sachs, head of capital markets at Proshare Advisors,
suggested short-dated, floating-rate bonds as another way to
hedge against rising rates but noted their returns are lower
than fixed-rate counterparts.
For speculative types, Sachs said there are ETFs that bet on
a further drop in bond prices.
The Proshares short 20-year Treasury ETF, whose price
rises when the Barclays' 20-year Treasury index falls, gained
0.85 percent on Wednesday, while Barclays' long-dated Treasury
index lost 0.76 percent. The $1.5 billion fund has had net
outflows of about $81 million so far this year, Lipper data
shows, although it drew record inflows in 2013 of nearly $800
STOCKS: TURN ON THE LIGHTS
Low-volatility and higher-yielding stocks such as utilities
could be an option for those in the equities space who may want
to steer clear of some of the hotter stocks and sectors of 2013
that are now richly valued.
In fact, utilities are already gaining favor after three
years of lagging the wider market. The S&P 500 Utilities Sector
Index is up nearly 7 percent year to date on a total return
basis compared with less than 1.5 percent for the S&P
500 on a comparable basis.
If the market becomes convinced the Fed will act sooner than
later, "fixed income portfolio (values) are about to drop as
yields increase," said Diane Garnick, founder and CEO of Clear
Alternatives, an asset management firm in New York. "One of the
safe havens, of course, is high yielding equities."
"It happens that utilities, because they're highly
regulated, tend to be a little safer than some of the other
equity names that are out there, and so I think that's one of
the reasons that utilities in particular are doing well,"
All but six of the S&P 500's 30 utility stocks have beaten
the wider market so far this year. On top of that, the group
sports an average dividend yield of 3.87 percent, more than a
full percentage point above the 10-year Treasury note's
yield of 2.74 percent.
(Additional reporting by Ryan Vlastelica, Ashley Lau and David
Gaffen; Editing by Dan Burns and Martin Howell)