You're listening to taking Stock and Pim Fox on Bloomberg Radio bonds. When will the Federal Reserve raise interest rates? Well, they're not going to raise them any times soon, at least that's according to many market watchers. Gene Tanuso is senior fixed income portfolio manager at Columbia thread Needle Investments, and he joins US now. Thanks very much for being here, Gene, thanks for having me. So what's your call? What exactly do you believe the Federal Reserve is going to do
between now and the end of the year. Yeah, I mean, I think communication has certainly been a challenge when listening to two Fed members and trying to predict what they're going to do. But I think if we just listen to what they're saying, UM, I think they definitely want to hike this year. And you know, our estimate is that September is more convenient for them to hike than a December hike at this point in time. So I
think you have a few things working for you. One, you know, the last couple of days, notwithstanding, UM markets are in a pretty accepting spot. Financial conditions UM have really improved since the last time they hiked equities at all time highs are pretty darn close to it, yields and spread levels pretty low, and the dollar has even softened a measurable amount here to date. The conditions are there for them to hike. The labor market, I would say,
is generally good enough. So now we're starting to hear this commentary, and if you just listen to not necessarily what you think they ought to do, but what they're saying they would like to do. I think when you get comments from the FED chair that the case for rate hike has strengthened, I think that is about as strong of language as she could use. So I really
do think they want to go. I think there's a whole question of urgency and whether or not the FED chair feels much more urgency this FED Vice chair stand Fisher does seem to think that way. Leo Brainerd FED Governor, who has been a devilish for some time, her too. She had five points about her hesitations. One when it comes to labor market, is there still lots of slack And she talked out the fact that people working part time because they can't fight full time jobs still at
levels to exceed the levels of the financial crisis. She looked at wage data not rising very much. She also looked at inflation falling short of forecasts, as did Neil Cosgari, President Neeapolis Fit. Then it's lock Art though he's President Atlanta Fit. He like you would say time for a serious discussion of a rate hike. But I think Dennis
has even opened the door to September. Yeah, I think it is on the table, And I think, you know, if we weren't so infatuated with the number two, we would look at the bevy of inflation data and say, you know, core inflation generally tends to be rising. It's in the one and a half to two and a half percent range, depending on which which measure you're looking at. Wages are also in the two to three percent growth
range and seem to be rising. So even if core PC is at one point six, I think if your mandate is price stability, that seems relatively consistent with that. We seem to be very infatuated with the number two. But as far as I'm concerned, one point six rounds to two. I wonder if you could just drive how as a manager of the Columbia Funds Series Trust one and you're one of the three managers of Belieah, the strategic incompanients. Um, you've got obviously a lot of government
related debt in the portfolio. What happens? How what do you do physically when you hear these prognostications of a twenty five basis point increase or I mean, is any of that cause you to hit the you know, sell button? Or what what do you do? I think you want to look at where interest rates are relative to expectations, and expectations for continued central bank easing are extraordinarily high. So we look across G ten markets from Europe to Japan,
uh US, Canada, etcetera. The US is the only market that has even a slight positive chance of a rate hike priced in over the next twelve months. Um, you know many other markets, uh most other markets pricing in a pretty good probability of a cut. So that's why when you have something like you know, last week Mario drog coming in delivering nothing but dovish commentary but no policy change, you start to see yields back up. So point being expectations are extraordinarily high makes it hard for
central banks to exceed those expectations. In a bond portfolio context, it's time to play it a little bit safer. It's time to preserve principle rain in maturities. Yes, you're giving up a little bit of yield, but frankly, in this environment, it's not that much UM. So we'd rather you concentrate on on a shorter duration portfolio that can preserve principle through a rising rate environment. Is it possible if the Fed raises Listen, they raise a key rate in September
and that's it. They will be raising rates once a year. As a guest, Uh just recently on Bluebird Television, UH pointed out, Boy, that's the case. It's good. That's why they keep up that pace. It's going to take a long time to get the key rate much higher. And I guess it also seems to me that if if the guess is wrong or the bed is wrong, and the economy isn't that strong, we have the Institute for Supply Management Services M and in fact tree numbers both
dipping pretty severely. Seems to me the Fed starting to raise rates could actually bullish for the long end, right, because if the economy slows down inflation doesn't move, then sooner or later you might say this is actually a reason to buy bonds. Yeah, And I think there are two important things that you look for when the Fed makes their policy announcement. One is do they move the short term rate? But two is also what are they
doing with that longer run interest rate projection? Over the last four years, we've seen that come down from four and a quarter down to three percent. And if you read through all of the commentary, all of the research that was pointed to a Jackson hole, there's a pretty strong case to be made that that number that forecast continues to come down, and the lower that comes down, the more that supports the long end of the curve. Now, I was looking at the performance of the fund, just
to put it into some context. You're to date, the fund is up the Columbia Strategic Income Fund as symbol. There is c O s I X. It's about seven and three quarters of a percent. So, okay, well done. How did you decide that the port folio needed Verizon bonds, bonds from Poland, from Brazil. You've got bonds in there that are Jinny May's, Plus you've got some mortgage trusts that are also in there. Tell me the strategy of what you specifically look for. Yeah, so for us that
our strategy has a very wide mandate. So we boil it down to the four basic risk factors that a bond manager can take in the global bond market. So interest rate risk is one that we've been talking about for the last several minutes, and of course you know that reflects the price sensitivity of a bond to changes in government rates. Credit risk is another piece that I think is a significantly important piece for us to analyze that was very attractively priced earlier in the year, I
would say now not nearly so attractively priced. And the other two risks I think that are very important for us to monitor, particularly in these markets are currency risk and inflation risk. Currency risk is something that has worked for you, meaning owning foreign currencies this year has actually been a pretty nice tale. And uh, inflation risk really is only just starting maybe to to pick up its head.
And so you know, as we look at the portfolio, what's gone on this year to contribute to that return profile. Very early in the year, it was about taking advantage of more attractive risks on the credit side, so it was about adding to high yield securities when the implied default rate was greater than what we thought defaults were going to uh be realized at um. You know, as we went through the year, that was a very profitable proposition.
Interest rates also continued to decline, So you've got both the credit factor and the duration factor working for you. That actually gives us a little bit of a queasy feeling because those things we we expect to have a diversification benefit, kind of like stocks and bonds together. Instead they're both going up at the same time. Gives us
a little bit of concern. So again, it's just about taking risk down, not wanting too much risk in this environment, and more lately been skewing towards mortgage backed securities because as we look at the income profile of all the bonds we own relative to their volatility, we think there's a better efficiency in the mortgage market on a prospective basis, right,
and of course explain for our listeners. And because I'm sure the first thing a lot of people are gonna say is, yeah, but if it's gonna start raising rates, then that's going to hit mortgage rates. How does that play through to MBS mortgage backed securities? We know there's not just duration, but there's repayment risk, there's all kinds. It's a complicated security to consider it certainly can be.
I would make one, I would say important point for the backdrop, and that's to look at where we are in the credit cycle and starts to differentiate that between the corporate credit cycle and the household or consumer credit cycle. So on the corporate side, we would argue we're in probably the eighth, if not ninth inning of of the credit cycle. Um, you know, companies really aren't growing earnings organically, it's uh, we're seeing leverage increase, We're seeing shareholder friendly
activity increase. Um. So things that aren't necessarily alarming right here right now, but ultimately do so the seeds of the next problem. Whereas on the household side, we've seen a tremendous fundamental recovery in consumer balance sheets. Um, you know, part of that is because of the scars of the
financial crisis, some of that is because of regulation. But you mix those things together, you have consumers who are acting we think, pretty rationally and can withstand some of those bumps, probably a bit more easily than the corporate sector can. So just in a nutshell, then if I'm in bonds right now. I want to I want to be short duration, and I would look at something that has a lot of mortagspacked securities. Yeah, I think that's you know, for us right now, that would be our
our preference. Um. But but I think it's not. It's not time to really stick your neck out there. If there's a strategy with a really high yield, I'd be pretty skeptical of of the risk that comes along with them, all right, Geane to do so. I think a lot of people are worried about risk and their skeptical and they're just wondering what to do. So you gave us
some good ideas when it comes to fixed income. In fact, gena senior fixed income portfolio manager at Columbia Threat Needle Investments, this is bloomwork.