(Repeats earlier story with no changes to text)
By David Randall
NEW YORK, March 24 Rising short-term interest
rates in the United States are prompting Lipper Award-winning
bond fund managers to add emerging-market debt and non-agency
backed residential mortgages that they say offer more potential
for gains in the year ahead.
Managers from firms including AllianceBernstein, BlackRock
Inc and Thornburg Investment Management are bracing for further
rate increases by the Federal Reserve, making U.S. high-yield
debt unattractive as highly-leveraged companies and
municipalities have a more difficult time rolling over their
Instead, managers say, emerging-market debt in countries
like Brazil and Mexico that have slowly-stabilizing economies
and are undertaking structural reforms, as well as municipal
debt issued by cities like Dallas that are in the center of
strong regional economies, look more promising.
"We are in a phase where diversification is going to be a
big strategy" because there are fewer attractive assets given
rising rates, said Gershon Distenfeld, portfolio manager of the
AllianceBernstein High Income fund. "Our fund was up
15 percent last year and we don't see that happening again."
Distenfeld said that he now has about 40 percent of his
portfolio invested in the United States, compared with 75
percent at this time last year. He has been moving chiefly into
both dollar and local-currency denominated securities in Brazil.
U.S. high yield, by comparison, is "on the rich side now,"
he said. High-yield debt, for instance, suffered steep losses as
investors moved to safer assets during Tuesday's stock market
sell-off, while emerging-market debt retained more of its value.
The Fed raised short-term interest rates for the second time
in three months on March 15, and is widely expected to tighten
again at least two more times this year. Rising interest rates
push down the price of older bonds with lower rates, eating into
the returns of bond funds.
Mexico looks attractive given its economic reforms, said Bob
Miller, the lead portfolio manager of the BlackRock Total Return
fund. The peso is regaining value following a steep
decline after the unexpected victory of U.S. President Donald
Trump, Miller said.
He added that concern about more aggressive trade
negotiations between the United States and Mexico "seems to have
calmed down to a reasonable degree."
Miller remained optimistic about the strength of the U.S.
economy. "There's no obvious imbalance" that could point to a
coming recession, he said.
Not every Lipper Award-winning bond fund manager is so
upbeat, however. Steve Kane, portfolio manager of TCW Core Fixed
Income fund, said that he has just 2 percent of his
fund in high-yield debt, and near zero of his fund in
emerging-market debt, because he expects that the U.S. economy
is near the end of its expansion and a recession is becoming
He is still finding value in non-agency residential
mortgages, however, because he sees "continuing improving
fundamentals even if we reach an economic downturn" thanks to
rising home prices and wage growth, he said. He has also been
buying triple-A rated commercial mortgage-backed securities that
have been hurt by concerns about declining mall traffic in the
age of online shopping.
"We are concerned like a lot of folks with the decimation of
bricks and mortar retail, but we don't think we will see
significant losses at the triple-A level," he said.
Chris Ryon, co-portfolio manager of the Thornburg
Intermediate Municipal Funds, said that he had been
buying shorter-duration bonds and focusing on higher-quality
issues as interest rates rise.
He has been buying general-obligation bonds issued by some
lower-rated cities such as Dallas and Chicago, however, because
he sees the issues that have led to their lower credit ratings
as more political than economic in nature.
"They have strong economies and an ability to pay," he said.
(Reporting by David Randall; Editing by Jennifer Ablan and