Spin cycle: Great rotation won't trigger 'mass exodus' from bonds

Not surprisingly, bond market representatives aren't expecting a mass exodus out of fixed income and into equities amid the threat of rising interest rates — or at least that's their story. “From our perspective, the great rotation has been going on for a while, because the return profile of fixed income is just not that exciting right now,” said Gibson Smith, chief investment officer of fixed income at Janus Capital Group Inc. “I don't think we'll see a mass move out of fixed income; I think it will be gradual,” he added. “We don't worry about a mass exodus.” Mr. Smith was speaking Thursday in Chicago as part of a panel discussion at the Morningstar Inc. Investment Conference. With the yield on the benchmark 10-year Treasury bond hovering above 2.1% since late May, the bond market is rightly concerned about a knee-jerk reaction from nervous investors. That nervousness was in some ways reflected in views of the panel, which focused on risks and rewards in corporate bonds. “There will be bumps and bruises in fixed income,” said Ryan Brist, a portfolio manager at Western Asset Management. “The price [of bonds] has moved dramatically already, and if you make a dramatic move today out of bonds and into stocks, you could be making a mistake,” he added. “But we're not calling for a dramatic event or rush to the exits here.” James Keenan, managing director and head of leveraged finance portfolios within BlackRock Inc.'s Americas Fixed Income Group, said high-yield corporate debt has been the most attractive fixed-income category over the past few years, from a valuation perspective. “If you looked at the market today, our high-yield strategy is probably the most flexible,” he said. Mr. Smith cited illiquidity as one of the most underappreciated risks in the markets today. “Illiquidity is an issue we feel isn't priced appropriately, and we believe investors don't understand it,” he said. “With that in mind, if the rotation gets sizable, it could lead to a disorderly outcome.”