Fixed Income Strategy?

Peter Fisher of BlackRock, Inc., contributed an article to Investment News on positioning fixed income portfolios now that the secular decline in interest rates has ended.  His ultimate advice is to invest in a well managed bond fund that has wide latitude in allocating among bond sectors.  Actually not such bad advice, considering BlackRock has been among the best bond managers across varying market conditions.

I was disappointed , though, in the discussion that Fisher used to back up his recommendations.  On the one hand, he advocates "holding some exposure to non-government spread sectors," because they are "less linked to the direction of interest rates."  On the other hand, he encourages investors to "move higher in quality within spread sectors in order to protect their portfolio if growth should slow down."  In other words, accept some credit risk but not very much.  Which means you will still be heavily exposed to interest rate risk.  Mr. Fisher also states that "rates are likely to go higher over the next year or so. But we don't know when."

And then there is this:

"Now is still the time to capture spread income while shifting up in quality within sectors and getting more flexibility in managing duration risks in anticipation of the volatility that eventually will come when the rate environment shifts."

I've read the passage several times and I'm still not sure that I understood what he was trying to say.

So here we are in a low interest rate environment, with weak economic fundamentals, in which the next major move in interest rates is expected to be up.  What to do?  Shorten duration by shortening maturities and increasing coupons.  Get exposure to high quality, adjustable rate debt.  (Bank Loan funds do not count.)  Since AAA-rated municipal bonds yield about the same as treasuries, they are ideal for taxable accounts.  Try matching specific maturities to cash outlay events (tuition payment, wedding gift).  You might even consider an excellent bond manager like BlackRock.