To David MacEwen, the talk about the bond bubble is a lot of baloney.
That isn't to say that the chief investment officer of fixed income at
American Century Investments is unconcerned. The firm pegs the chance of a double-dip
recession at 38%.
However, Mr. MacEwen said, a more likely scenario is 1% to 3% growth in gross domestic product over the next few years, corresponding with a slow rise in interest rates.
That isn't a problem for American Century, which has a little more than one-third of its $95 billion in mutual fund assets in fixed income, he said. The flows into bond funds are stickier than many think, and American Century is in a good position to hold on to that money, Mr. MacEwen said.
The firm is considering expanding its fixed-income offerings to include global bond funds for both international and U.S. investors.
Mr. MacEwen recently sat down to discuss his outlook for fixed income over the next few months.
Q. Why don't you think that there is a bond bubble?
A. When I think of an asset bubble, I think of something that could drop a lot — like 20% to 40%. Bonds don't really work that way. If interest rates go up, bond prices do go down, but it takes an incredible move in interest rates to see a huge loss. For instance, to get a 30% decline in a core bond fund, interest rates would have to go up 10% in one year. They just don't move that way.
The other thing about the bond bubble story is that there is a behavioral-finance element, and there are demographics. The people who have money in this country tend to be baby boomers. Those people are nearing or are in retirement, and that's a time when they should be thinking about investing more in fixed income. When you look at the fact that there is going to be 36% growth in the 65-and-older age group over the next 10 years, that says a lot about the kind of money that is going into fixed income, and should stay there. Then there is the behavioral piece, which shows that after large declines in the stock market, people avoid stocks for a long time. Research has shown that people don't flow back into stocks right away.
Q. Do you attribute these heavy flows into bonds to demographics or fear?
A. It's hard to disentangle it; it all comes together. The demographic piece is pretty extreme. And if you look at the mutual fund business, half of total assets are still in equities. Bonds represent only a quarter of those assets, and another quarter is in money market funds. So are investors overexposed to bonds if that's where the assets are and the average investor isn't a kid? They probably still are underinvested in bonds.
Q. Should investors buy more bonds?
A. If you are an investor who is 50 years old and has 30% in bonds, and at 65, you are supposed to be 60% in bonds, then it is a question that needs to be asked. A lot of these investors lived through a 20-year bull stock market. As we have seen over [the] last 10 years, stocks can go down and stay down. A lot of the baby boomers are inclined to stocks and overallocated to stocks. So any movement they are making toward bonds makes sense; they should have them. That's why you aren't seeing a stampede out of bonds.
Q. How would you characterize the fixed-income environment?
A. The general macroeconomic environment right now doesn't support rising interest rates. Not that interest rates aren't going to go up, but we don't expect them to go up multiple percentage points. We do think that the 9.6% unemployment rate could potentially go up to double digits, and that could contribute to interest rates' going up.
Q. What is your biggest concern?
A. A double dip. Our team estimates a 38% chance of a double-dip recession, which means below 1% growth — not necessarily negative growth — over the next 64 months. Having said that, that's not our base case. Our base case is that we muddle along at 1% to 3% growth for the next several months.
E-mail Jessica Toonkel at [email protected].
