Investors seeking income in today’s market might want to consider securitized products, as noted by Brian Warren, chief investment officer and portfolio manager at TCW in Los Angeles. For now, it seems investors are entering a sort of “waiting area” while the economy finds its footing, according to Hollen. There’s a degree of uncertainty about the future, and Whalen suggests that the economy may be weaker than anticipated. Interestingly, he mentioned that in many areas of the bond market, investors aren’t really being compensated for credit risk.
This week saw the release of key inflation indicators, notably the May consumer price index, with the producer price index coming out on Friday. Whalen commented on the potential for a scenario where everything goes well—perhaps a smooth landing—or even no landing at all, something he compared to a planar analogy. If that’s the case, it seems to be somewhat factored into the risks associated with things like head office bonds and high yields. He noted that these high yields make up about two-thirds of TCW’s flexible revenue ETF (FLXR).
Instead of exchanging traditional fixed income portfolios for these options, Whalen sees these securities as a supplement. The goal is to generate good income for shareholders, maintaining quality and liquidity while being poised for future disturbances in the bond market.
The portfolio is diversified across several asset classes, including agency mortgage-backed securities (MBS), non-agency mortgages, asset-backed securities, and commercial mortgage-backed securities. The Treasury is viewed as either directly or indirectly supported, suggesting that yields might continue to fluctuate. The rates are expected to eventually decrease, and volatility could be part of the waiting period.
Hollen mentioned that, in purchasing many bonds, there’s still a chance to concentrate on specific properties rather than just the overall capital structure, which is an interesting point to consider in this environment.
