Economic uncertainty has been removed on multiple fronts in recent weeks. Chinese tariffs, NAFTA, the Fed’s policy bias for 2020, and Brexit are all seeing clarity, suggests Jack Bowers, editor of Fidelity Monitor & Insight.
This is good news for the stocks, but for bond investors, not so much. Don’t get me wrong, bonds are not under any immediate threat. Inflation pressures remain muted thanks to technology disruption, which is creating abundance out of scarcity.
And with ultra-low (in some cases negative) rates in foreign developed markets unlikely to go away anytime soon, foreign investors’ appetite for U.S. bonds should limit any domestic increase in long-term rates.
Still, taking on excess interest rate risk — which was richly rewarded in 2019 — may not be the most savvy move going forward. As such, this month we are trimming ratings on interest-rate sensitive bond funds .
Long-term municipals fall into this category. Because of their relatively low yields (which only make sense for those in the top tax brackets) it doesn’t take much to wipe out a year’s worth of income.
As for former model portfolio holding Fidelity Corporate Bond (FCBFX), we’ve decided to replace it with Fidelity Total Bond (FTBFX), which has a similar yield but 30% less interest-rate risk.
It accomplishes this by allocating up to 20% to lower-quality issues (currently 12% in high yield and 4% in emerging market debt).
Total Bond’s interest rate risk is further moderated by other portfolio holdings whose aggregate duration scores are very low. For those who pick and choose on their own, a move from Corporate Bond to slightly riskier Fidelity Focused High Income (FHIFX) could also make sense.
Both funds operate in a broad segment of improving corporate debt, with Corporate Bond investing just above the high yield line (A/BBB) and Focused just below it (BB/B).
Both have potential for modest capital gains thanks to Fidelity’s independent research. But only Focused, with one-third the duration exposure of Corporate Bond, sharply limits interest rate risk.
