How to get income in a DIRT low income world?

I'm Jack Otter, editor of Barrons.com, here with Priscilla Hancock, who is the global fixed income strategist at JPMorgan.

So, let's start off with your big picture view of where the Feds non-move leaves us in looking at fixed income?

Well, it's a good question. I think it's somewhat a scratching in the heads.

If you think about the reason the Fed would typically tighten, it's because growth and/or inflation are getting out of control in the United States.

Clearly we don't have either of those situations.

What they do have now is a situation where they're trying to figure out when they can actually just remove the extraordinary accommodation that they've been putting in.

And the U.S. numbers alone would suggest that we should do that.

What they told us last week was, well, the U.S. numbers may look like they're okay, but we're looking at the fact that we've had a strengthening dollar, we have weak commodity prices

And there's a slow down happening in the emerging markets.

And we're not quite sure how dramatic that slow down is, and because we're concerned about that, we're gonna be cautious.

And if you look back in history, there've been times when everything looked okay here, but there were global problems that did reverberate back to this country.

That's exactly right. If you look at the late 90s for instance, you had a similar situation.

The Fed tightening the face of that, and those times, the big emerging market partner was Mexico, put too much pressure on them.

You know, a strong dollar and higher rates here, increases the cost of borrowing for emerging markets.

So, it created a crisis, and I think the Fed is concerned about that, they've looked around the world since the crisis.

We've had twelve central banks that have tightened, all twelve have since eased.

So, you really almost can't be too cautious here.

So, into this world, where should investors be putting their money?

Well, if you think about that, that probably means that there's an opportunity for duration, buying longer bonds, because long term rates are gonna stay low.

And they possibly will stay low even once the Fed raises rates.

But I think you have to be looking at some of the risks sectors today, and you recognize that, in the United States,

the economy is doing pretty well, so corporate credit has a very attractive top line.

Defaults are very low, particularly in the high yield sector, and you're getting paid a pretty attractive coupon there.

In fact, spreads have increased 175 basis points since a year ago.

You can get over five percents spread in the U.S. high yield market, ignoring energy and metals in mining

And when you say spread, you're referring to the distance between what that bond is paying and the equivalent treasury bond.

An equivalent treasury bond, which is about a four to four and a half year treasury bond, that's about the average duration of the high yield market.

But you're making an extinction between high yield and then just standard corporate credit, which you say is exposed to some other things that might be a little dangerous.

Well that's exactly right. I mean you're seeing corporate credit strength across the board, but when you look at the investment grade sectors, those credits that are rated triple B or higher.

Many U.S. markets have global exposure, think of P&G for instance, and I'm not using them, only for illustrative purposes.

But if you think about it, well, they have a lot of global demand.

And the bottom line is that the global markets are slowing, that could put some pressure on them.

The other thing about the investment grade sector we're seeing is that, you know, money is cheap.

And with cheap money, the question is, do they start borrowing too much? Do they increase their leverage? Does it get them into trouble?

Not in the next three to six months, but over the longer term.

One more area of interest, particularly to people with higher incomes in taxable accounts, municipal bonds, do you think there is some value there?

Yes, I mean they're cheap to taxable bonds, and what I mean by that is you can get rates in some parts of the curve that are the same as tax rates and it's tax free.

So if you're in a higher tax bracket, municipals are very attractive, and the other thing about municipals is that when rates do move up, if they move up,

they typically outperform, in other words they don't lose as much value as comparable taxable bonds.

A couple sectors, you have to be careful of them in municipal market, higher education is one of them, that probably surprises people.

If you think about, not the Harvards of the world, but if you think about the changes that are happening in the educational system,

a lot of people going to community college, that's gonna put pressure on sort of that middle and lower tier of small liberal arts colleges.

They just don't have the number of people that can pay those high tuition. So, we're cautious about that sector.

Great insight! Thanks so much, Priscilla.

My pleasure, thank you.