Next big move in bonds? Down, warns Abby Cohen

Goldman Sachs senior investment strategist the latest to make bearish call on fixed-income; credit hedge funds no place to hide, either

By Jason Kephart

Dec 5, 2012 @ 1:00 pm (Updated 4:35 pm) EST

bonds, fixed income

The bearish calls on bonds just keep getting louder.

Abby Joseph Cohen, senior investment strategist at Goldman Sachs & Co., is the latest voice to join the swelling choir of market watchers predicting that bond funds are headed for trouble.

“The next big move we see in bonds is down,” Ms. Cohen said Wednesday morning at the Bloomberg Hedge Funds Summit in New York City. “Bonds are usually safe, but it depends what yield you buy them at.”

With most fixed-income assets trading at or near record-low yields, there would be little buffer should the Federal Reserve start raising the overnight rate. The Fed has said it intends to keep rates at their current lows until at least 2015. A resolution to the fiscal cliff could pump up the economy, however. That, in turn, could force the Fed to raise rates earlier.

Long-only bond mutual funds, which have recorded more than $1 trillion in inflows since 2008, weren't the only vehicle under scrutiny at the summit. Credit hedge funds were also given a less than enthusiastic endorsement.

“Credit strategies that performed well this year were highly leveraged,” said Jacob Gottlieb, managing partner and chief investment officer at Visium Asset Management. “Here, at the end of 2012, how much tighter can spreads get? Do you really want to make the bet that this is going to continue?”

Ms. Cohen does see a bright spot in stocks, particularly large caps in the United States.

“We think equities dramatically outperform fixed-income,” she said. “The internal dynamics of the U.S. economy aren't bad.”

The external situation, namely the fiscal cliff, is a much different story. Experts continue to contend that if the president and Congress can come to an agreement, it will mean good things for stocks.

“The U.S. holds the greatest potential for return in 2013,” said Steven Einhorn, vice chairman of Omega Advisors Inc. “If Washington can deliver a grand bargain, it will unlock returns in risk assets, particularly equities.”