An Interview with Gibson Smith, Co-CIO and Fixed Income Manager, Janus Capital Management.
Manages $41 billion for individual and institutional investors
Q: What can we expect if interest rates increase?
A: You bring up an excellent question about interest rates, and there's a lot of concern about a bond bubble in the markets today. We don't subscribe to that view and tend to disagree that the entire fixed income market is in a bubble right now, although there are segments of the market that are inflated due to monetary policy, as well as influences due to the structural changes that took place post the 2008 crisis. When we look at Treasuries, for example, the yields or returns available in the treasury market are quite unattractive today and not exciting by any means. But when we look at the credit markets, both investment grade and high-yield, we think there are tremendous opportunities in terms of additional spread tightening and good risk/reward profiles for our clients.
Q: What short- and long-term impacts will there be on the markets given the Fed's decision to buy $600 billion of government bonds?
A: When we look at the Federal Reserve's quantitative easing programs, and there have been two, they have had influence on the fixed income markets; in particular, driving US Treasury yields lower, and creating what we believe are uninteresting and not exciting opportunities in the US Treasury market. It's important to note, though, that US Treasuries are an important part of fixed income investing in that they provide hedges against events in the markets that are unanticipated. When we think about the outcomes from quantitative easing, we believe that the liquidity entering the system will ultimately be positive for risk assets -- investment grade credit, high-yield credit and, ultimately, equity securities.
Q: Emerging market fixed income is gaining a lot of attention. Is this a fad or a more promising long-term investment?
A: Well, when we look at emerging market debt as an asset class, emerging markets today are very different than the emerging markets we've known over the last 20 years. You think about the upgrades of Russia, Mexico, Brazil, again, emerging markets today are very different. When we look at the underlying valuations in emerging market debt today, we see some opportunities, but we also see some countries that are significantly overvalued at current valuations, and are finding better opportunities in the European and US credit markets versus emerging markets today. But we do believe that, with the liquidity in the system and the growth prospects for so many of these companies, there will be good opportunities in emerging market debt.
Q: Is there still value in corporate credit? What about global and emerging market bonds?
A: When we look across the fixed income universe in terms of opportunities, we still believe that investment grade credit and high-yield credit offers a good opportunity from a risk/reward standpoint. When we look at the relative valuations of credit versus mortgages, treasuries and agencies, credit continues to offer a competitive advantage in terms of return generation. On top of that, there is a fundamental backdrop of deleveraging in the US economy that has been focused in corporate America today. As
corporations deliver their balance sheet, bondholders are rewarded with tighter spreads. We look to benefit from this opportunity by being overweight high-yield and investment grade in our portfolios.
Q: What are your thoughts about high-yield?
A: One of our areas of focus is the high-yield universe, where we think there are great opportunities as the fundamental deleveraging of Corporate America continues, and high- yield companies will benefit from that. We're finding many management teams are -- we're finding many management teams are focused on deleveraging their capital structures to better position their companies for the uncertain economic environment that we're in. As corporations delever their capital structures, as bondholders we stand to benefit from their deleveraging as spreads tighten on their securities.
This interview was conducted on Nov. 9, 2010.
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