Take Five: Prudential’s Robert Tipp

Mixed messages from the Fed have caused market volatility, strategist says

You can blame the recent Treasury market volatility on the series of mixed messages from the Board of Governors of the Federal Reserve System, according to Robert Tipp, chief investment strategist for fixed income at Prudential Inc.
InvestmentNews: What is driving the volatility in Treasury bond yields, including a 50-basis-point spike on the 10-year Treasury over the past 30 days?
Mr. Tipp: There’s been a confluence of long-term and short-term bearish factors lining up to give you an overreaction in the bond market. First, the Fed confused investors when they gave some forward guidance, saying they could increase or decrease the amount of bonds they are purchasing. The market took that to mean the Fed doesn’t have any plans to change its quantitative-easing policy, and that took us to levels of yield we probably should not have been at of just above 1.6% on the 10-year Treasury. But subsequent comments by the Fed indicate they are actually likely to bring down the amount they are purchasing later this year, and that represented an about-face by the Fed to investors.
InvestmentNews: How should investors in fixed-income mutual funds adjust to the interest rate environment?
Mr. Tipp: At this point, the market has gone a long way toward pricing the Fed out of the market. Investors have factored in that the Fed will be backing away and that they will begin hiking rates in 2015. That has left a lot of areas of the market on the cheap side, and I think it’s a very good environment for investors to have a long-term diversified approach
InvestmentNews: Are rising Treasury bond yields at this point good or bad for the equity markets?
Mr. Tipp: I think this environment of a very slow upward trend for Treasury rates is going to still allow some sectors of fixed income to have good returns, and I think the equity markets over the long term will have good returns, as well.
InvestmentNews: High-yield bonds have been selling off a bit recently. Is the high-yield rally over?
Mr. Tipp: The high-yield market is getting taken down here as a result of some of the hesitation in the equity market but more so as a result of the sell-off in Treasury bonds. Investors should realize that mid-single-digit yields on double-B-rated bonds are attractive in this environment.
InvestmentNews: What impact will rising rates have on the housing market recovery?
Mr. Tipp: This is not the buoyant U.S. economy of 1994. This is an economy growing at a couple percent per year against a global background where growth is either disappointing or outright very negative. And there is not a lot of room to help out on either the fiscal or monetary side. So while the housing market is recovering here, it will require the rest of the pieces of the puzzle to stay together. Ultimately, the rising rates will be bad for the housing recovery, but with an improving economy, you will get some rising rates. The question is, how much of the recovery will be curtailed by the rising rates?